The garden office part 2: Personal ownership
The tax treatment of the garden office pod depends on whether it is used wholly or partially for business, and if it is owned by the individual or the business. This time we examine personal ownership of the pod.
Where the pod is going to have a mix of business and personal use, perhaps in order to keep within permitted development rules, consideration should be given to incurring the installation costs personally. Personal ownership can help to keep things simple in the longer term, although comes at a price in the short term.
The immediate downside is that the individual will need to find the funds for the installation, which may mean borrowing personally or extracting additional funds from their business. For an incorporated business, this could mean an extra tax cost on additional dividends or salary. It also means forgoing any potential tax reliefs on the installation of the unit which the individual’s business may otherwise have been able to claim (which I’ll look at in part 3 of this series).
Although tax reliefs for the installation will not be available if the pod is in personal ownership, the individual should be able to recover business-related running costs from their business (incorporated or otherwise). The business in its turn will be able to claim tax relief on those costs.
There are two main approaches to recovering these costs from the business; charging a rent or making an expense claim. There are pros and cons to each approach.
Provided that the individual is not operating as a sole trader, they could charge rent to their business. This effectively results in the creation of a rental business, which will have an impact for any other joint owners of the whole property, such as a spouse or partner.
Against this rental income the costs related to the business’s use of the pod – heating, lighting etc – can be offset. Any rent charged in excess of any expenses which can be attributed to occupation by the business will be taxable on the individual (and other joint owners), and will need to be reported as rental receipts on their self-assessment return(s).
The rental approach does allow relief for a wider range of expenses to be claimed - including a proportion of council tax, and mortgage interest - but it is more time consuming, and the tax benefits may be small.
Neither rent-a-room relief nor the £1,000 property allowance will be available to the homeowner(s) to cover any ‘profits’ on rental from the business. The former is denied because the business is not occupying for residential purposes; the latter is specifically precluded when the property income is received from a connected business.
As a further constraint, company directors should not be charging their company excessive rents, as they would not be acting in the best interests of the company.
The alternative to charging rent is to recharge the relevant, business-related running costs of the pod only.
This should be straightforward for an unincorporated business as long as any expenses charged are ‘wholly and exclusively’ for the benefit of the trade. For an incorporated business, the director can recharge costs provided that they perform some or all of their duties from home.
There are some simplified approaches for those who don’t want to keep records, or whose business use is very modest.
For the incorporated business, the homeworking director can opt to claim the homeworking allowance (worth £26 per month to cover the costs of heat and light) plus the cost of any business calls.
Alternatively, provided they keep the necessary supporting paperwork, the director can claim the actual additional costs of heating, lighting, water and any applicable business rates. Unlike the rental option above, the home owner/ director can’t claim any relief for a proportion of mortgage or loan interest, council tax or water rates.
For the unincorporated business, there is a similar simplified scheme. As long as the individual is working more than 25 hours a week at home, they can claim a flat rate allowance towards running costs.
In practice, it is likely that individuals will want to recharge actual costs where possible, since the simplified flat rate amounts are not very generous.
In addition to running costs, the business can pay for any furnishings or equipment which the individual will need in order to carry out their work, and claim capital allowances on the cost. This assumes of course that private use is insignificant in all cases to avoid either apportionment issues for the unincorporated business, or the risk of benefit in kind costs for the company director.
Private residence relief and sale of home
Where the pod has any private use, that should avoid a restriction on private residence relief (PRR) for capital gains tax, when the individual comes to sell their home with or without the pod.
This CGT relief is denied on any part of a dwelling house which is used exclusively for the purposes of a trade or business (s224(1) TCGA 1992). Where there is such exclusive use, then the gain relating to that room or area needs to be apportioned out and tax charged. The same principle applies to any free-standing structure like a pod in the garden of the dwelling and the land on which it stands.
Provided that the new home office is not used exclusively for work purposes PRR should not be restricted. While the test of ‘exclusive’ business use is quite high, the HMRC manuals do suggest that occasional or minor private use is insufficient to avoid the PRR restriction and it expects to see regular residential use.
There is unlikely to be an issue where the pod doubles as a play room, or has a sofa and television in the office to watch TV with (or away from) the family, or contains gym or craft equipment – pods can be put to lots of other purposes outside working hours.
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Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.