Use of Home claim

How can I phrase this?

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Dear Aweb hive mind,

Please let me ask for your help with this one thing I am looking at today. A client of mine is asking if he can get his company to pay some of his personal rent for use of home as office. And he is exposing his understanding of how such things work to me in that email:

"The company gets tax relief on the 'rent' but the rent becomes taxable in the hands of the directors/shareholders. The director is, however, only taxed on the profit from their 'property rental'. This is calculated using the normal income from property rules, which effectively puts them in the same position as self-employed people - they can claim a proportion of the mortgage interest/gas, electricity, council tax, water, insurance, repairs, cleaning etc etc.

Therefore, if the 'Rent' paid to me by the company is exactly the same figure as the total of the allowable expenses applicable to this property income, then the profit is zero, there is no tax liability and as such no need to even report it on SA tax return property pages."

Of course, if he were to claim rental expenses in his SATR (which I guess he can do) they would have to be apportioned but they would not add up to the same amount as the rental income. He also can't claim the mortgage interest obviously but only financial costs relief instead. Therefore he is incorrect in saying that the profit is zero, and that there is no tax liability, that as such no need to even report it on SA tax return property pages.

My question is. How would you phrase your reply to his email? 

Many thanks for your time if indeed you have time to get back to me.

Replies (31)

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By Paul Crowley
13th Jun 2024 14:34

I would start by asking where he got the idea from. An article or a YouTube video? And request the link.
You are correct, any interest is a tax reducer, and the income uses up his base rate band.
If rent income exceeds £1,000 if must be disclosed to HMRC. Over £2.500 it must be on a tax return.

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Replying to Paul Crowley:
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By Cylhia66
13th Jun 2024 15:27

Thank you

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Replying to Paul Crowley:
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By Mr_awol
13th Jun 2024 17:18

Paul Crowley wrote:

If rent income exceeds £1,000 if must be disclosed to HMRC. Over £2.500 it must be on a tax return.

£1k? £312 can be paid to employees tax-free, and i would say that includes directors (no claim on SA for tax relief if no monies paid though). I'm unsure of (and haven't checked) whether the word 'payment' is used in the legislation and if so, how that affects a DLA credit as opposed to an actual payment (i suspect this will be simpler than the beneficial loan interest equivalent though).

I assume the reference to £1k is in relation to lettings allowance though which of course is not appropriate where the payer is a close company of which the recipient is a participator - which i expect is the case given the OPs use of the phrases 'my client' and 'his company'

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Replying to Mr_awol:
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By Paul Crowley
13th Jun 2024 17:35

Agree all
But I would be wary of a WFH allowance if the area being worked in is let to the company, even if HMRC might well ignore the conflict, or more likely never know.
If the gross rent is less than £1,000 then the admin would never be worth it.
I mentioned it because f is something that the client can look up and is easily referenced by a link in the email to the client.
If the gross rent exceeds £1,000 then he cannot just ignore it.

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By Roland195
13th Jun 2024 14:35

Not really seeing a major issue - other than his slight misunderstanding of interest relief (which I'm not sure is relevant as you mention a rented property) then he's not really wrong. The amounts should be returned on his Self Assessment Return (and wouldn't qualify for the £1k property allowance) but don't see why that should be a problem?

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Replying to Roland195:
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By Cylhia66
13th Jun 2024 15:30

My apologies. My English has let me down. I said rented property but really he owns his property.

The issue I think is where he thinks that the property expenses will equate to the property income reducing the Income tax due down to NIL.

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Replying to Cylhia66:
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By Roland195
13th Jun 2024 15:37

So he's a little bit wrong, perhaps from reading an out of date article - presumably this is what he pays you for so still not seeing a problem?

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By Jane Wanless
13th Jun 2024 14:49

Has the client checked with their mortgage provide and insurer that they're OK with the sub-let of the property to the company? Will there be any issue re business rates/operating a business in a residential area?

How much "use of home" is there? the possible claim might not be as much as the client suspects. Is it worth the hassle?

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Replying to janewanless:
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By Roland195
13th Jun 2024 15:06

Have you ever encountered such an issue in real life?

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Replying to Roland195:
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By David Ex
13th Jun 2024 15:19

Roland195 wrote:

Have you ever encountered such an issue in real life?

I think rules apply whether or not we have encountered them. It's "self" assessment and I would have thought professional advisers would advise clients to act according to the law.

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Replying to David Ex:
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By Roland195
13th Jun 2024 15:30

But what rule or law do you believe to be being contravened? (are you telling me you have sought permission from your Local Council & Mortgage Lender to work from home?)

The restrictions on operating businesses from home, if enforced at all, relate to situations where neighbours or infrastructure will be effected. If the client in question was planning on opening a cafe in their kitchen then we would have an issue.

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Replying to Roland195:
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By Truthsayer
14th Jun 2024 09:36

Affected, not effected. I you have effected a neighbour, then you need to account for child support payments.

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Replying to janewanless:
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By Cylhia66
13th Jun 2024 15:32

My apologies. My English has let me down. I said rented property but really he owns his property.

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Replying to Cylhia66:
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By Roland195
14th Jun 2024 09:52

No worries, so has mine it seems. Thankfully the dedicated professionals on this site while usually at pains to point out aren't lawyers don't mind moonlighting as English teachers.

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Replying to Roland195:
By SteveHa
14th Jun 2024 11:46

I think you need a comma after, "this site" and again after, "lawyers" ;)

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DougScott
By Dougscott
13th Jun 2024 15:20

You are supposed to be advising him! No issue with individual renting office space to his company and indeed rent could be set to match expenditure and it may be more tax efficient to pay more rent (and make a profit) than pay more dividend.

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Replying to Dougscott:
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By Cylhia66
13th Jun 2024 15:36

I can't get my head around this. How could the expenditure match the income?

Unless you work out the property expenditure first and then claim the same amount as rent? Can you do that?

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Replying to Cylhia66:
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By Mr_awol
13th Jun 2024 17:22

The director can charge almost what (s)he wants - the main restrictions being:
1) (s)he cant charge an excessive amount because it could be disallowed CT relief and/or be assessed as something else (i.e. earnings).
2) If (s)he makes a loss on rent to a connected party due to a below-market rent then the claimable expenses are likely to be restricted to the rent charged

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Replying to Cylhia66:
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By Paul Crowley
13th Jun 2024 17:43

Therein lies the problem.
Unless the rent is calculated monthly and rent is varied each month , there will be a mismatch.
All very easy to be precise about with 20/20 hindsight.

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Replying to Cylhia66:
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By Paul Crowley
13th Jun 2024 17:43

Therein lies the problem.
Unless the rent is calculated monthly and rent is varied each month , there will be a mismatch.
All very easy to be precise about with 20/20 hindsight.

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Replying to Paul Crowley:
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By Truthsayer
14th Jun 2024 09:43

So do it with 20/20 hindsight via the DLA, just like everyone does with dividends! That way you always get the figure you want. I have never seen HMRC challenge that.

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Replying to Cylhia66:
DougScott
By Dougscott
13th Jun 2024 19:02

Well you couldset up a licence agreement such that the licensor bills the licensee the actual costs in arrears.

Otherwise you can have a pretty good estimate every year. A small loss one year, small profit the next, if you really don't want to extract profit via rent.

Most of my small limited company clients that work from home have this kind of arrangement. As long as all charges are reasonable then there shouldn't be an issue.

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Intercity
By Mr Hankey
13th Jun 2024 16:06

Whatever the justifiable amount is, wouldn't it be easier to just to enter that amount as a use of home as office charge through the company profit and loss account and stop there?

I don't see why the extra steps of declaring rental income and rental expenses on the personal tax return are needed.

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Replying to Mr Hankey:
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By Paul Crowley
13th Jun 2024 18:00

That is what I prefer.
Last time I had a challenge on this was 30? years ago. when rent a room relief was newish.
At the time it was only£2,500 or so and lots of people were promoting that as a yardstick. HMRC stopped it afterwards.
We wasted lots of time arguing about it and the IR35 thing sort of got lost in the argument.
Eventually agreed when HMRC lost interest in the argument and closed the enquiry with no additions. In my opinion HMRC were probably correct on both matters.

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Replying to Mr Hankey:
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By More unearned luck
13th Jun 2024 18:52

"...wouldn't it be easier to just to enter that amount as a use of home as office..."

Companies don't have homes. I think that you would have to add "director's". But with or without my amendment, how is that easier that merely typing four letters: r, e, n & t? In what way are your words more accurate than the r-word?

In many cases the conditions for the WFH allowance wouldn't be met. And if they were, the director would probably need to ensure that his pay complied with NMW.

With sold traders you apportion household costs between business and private, perhaps at a modest flat rate charge (eg £312). With companies, the company is using office space in property it doesn't own. The property owner and the company may agree that the company should pay for that use. Subletting isn't a problem as there is no subletting; the company merely has a licence. Opinions differ as to whether the licence should be in writing or not. A piece of paper ready to wave under the inspector's nose should the need arise might provide comfort.

If local authorities and mortgagees were to object to people bringing work home, then I would advise parents not to let their children do their homework at home.

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By Matrix
13th Jun 2024 16:51

Yes it is a good means of profit extraction.

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paddle steamer
By DJKL
13th Jun 2024 17:55

If company pays him rent for right to use the property but the employee lives there without paying anything to the company does employee not incur a BIK?

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Replying to DJKL:
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By Paul Crowley
13th Jun 2024 18:03

I assume we are talking about one room, not the entire house. But a valid point if it is really just where he has his computer and uses the room for non work activities.

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Replying to DJKL:
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By Justin Bryant
14th Jun 2024 13:03

Eh? The employer will have at most a licence to use the room (which is a personal right and not a proprietary interest). How can a licensee sub-licence that back to the licensor? Certainly, HMRC do not see an issue here.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim11503

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By AndyC555
14th Jun 2024 08:27

The following link gives you HMRC's views on the matter.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01476

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Replying to AndyC555:
DougScott
By Dougscott
14th Jun 2024 23:03

We are not talking about this.

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