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Tax treatment of converting director's garage to an office

Suppose ABC Ltd (not the real name) pays to have a garage at a domestic property (which is jointly owned by Mr and Mrs Smith) converted to habitable space which will then be used exclusively by the company for business purposes as a home office. Mr Smith is the sole shareholder and director of the company.

The company will not pay rent to Mr and Mrs Smith and will not claim any of the household expenses against its profits. 

 

How does the payment for the conversion by the company affect the subsequent CGT due on the sale of the house and is there a charge to income tax on the cost of the conversion on Mr and Mrs Smith?  Might there be a benefit-in-kind charge?

 

How is the payment treated in the accounts of ABC Ltd? Could it qualify for relief under the annual investment allowance? 

Or is it all too complicated and should Mr Smith just pay for the conversion out of his dividend income from ABC Ltd.

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I would set up a licence to occupy ...

 the garage between Mr & Mrs & Limited company. The licence would allow the company to occupy the garage during office hours and for Mr & Mrs to store possessions there at all times and to use the space outside of office hours. It would require that the company is responsible for any conversion works at the start and for to put the garage back in to its original state at the end of the licence period should Mr & Mrs Smith require it.

There should be no CGT implications as the premises is not solely used for business. (Business rates might be an issue but who would raise it I wonder).

The expenditure on renovation will mainly be capital by nature but as the premises are 'in which' the trade is carried out they will not be elligible for plant CA's. There may be some integral features but check the list.

I believe the terms of the licence could be robust enough to avoid any BIK implications but if the expenditure is significant then it may attract interest at a PAYE enquiry. The problem is where the business need is outweighed by the enhancement value to the owners. I'm not sure if there is case history on this but others might.

 

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By alanp
13th Apr 2012 20:50

Steve 

Steve 

this was very interesting and helpful.  it just about mirrors our situation.  Did you have any feedback or further ideas?  Is the licence to occupy reasonably straightforward to set up?  I will have a look online and raise all this with our accountant on Monday.
many ,many thanks.

Alan

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