Are you a director of a business and work from your own home premises? If so, you may be able to make a use of home claim through your company, to cover some of the costs incurred for business purposes.
There are a few elements that need to be considered when making a use of home claim within your company, as this cannot exceed a reasonable market rate rent for the use of your home office. We have therefore detailed the steps below to make the claim.
What is the reasonable market rate rent?
It is important to ensure the amount received from the company for your use of home claim does not exceed a reasonable market rate rent. The excess above the market rate could be treated as a distribution for you personally, creating an income tax liability. The amount the company can receive corporation tax relief on is also restricted to the market rate.
A reasonable market rate rent can be determined through desktop research of serviced offices local to your area and these details should be provided to DRG if you would like to make a claim. We can then review the details provided and advise on a reasonable fee to charge the company. The offices must be local to your home rather than the trading or registered address of your company.
Non-exclusive rental agreement
Once the market rate rent has been determined, a non-exclusive rental agreement should be entered into between the company and yourself. This agreement will state the value that should be paid by the company, and this is fixed for all future years, until a new agreement is entered into. The use of home claim will therefore not change each year.
As part of our internal review process when preparing the annual financial statements, we will be providing clients with these to complete, where a use of home claim has been made.
Including the expense within the annual financial statements
Once the above steps have been actioned, the value can be reflected in the annual financial statements for the company. This will be reflected as a rental expense with the other side of the journal being allocated against your directors’ loan account, where this is money owed to you. The company will therefore obtain corporation tax relief on the expense incurred.
Declaration on your self-assessment return
The final step of the use of home claim is declaring this on your self-assessment return, as you have received rental income from the company which is subject to income tax. We will provide you with a use of home claim calculation to complete and this will calculate the proportion of the costs that can be claimed against the rental income. Examples of costs that can be included are mortgage interest or rent, council tax, water, gas and electric.
Where the costs exceed the income received you are unable to generate a loss, as the property is being rented to a connected party (i.e. the company). You are also unable to utilise the £1,000 property allowance against the income, where it may have been more tax beneficial to do so.
If the income received exceeds the costs incurred, when completing the use of home claim calculation, then there will be taxable income to declare. As this is UK sourced property income you will be subject to tax on this regardless of your tax residency status.
Capital gains tax considerations
In addition to the above, there is a future consideration with regards to the capital gains tax position if you own the property you are making a use of home claim on. If you use a room within your home solely for business purposes, then this will restrict the principal private residence relief you are entitled to on the sale of your home. This is due to the room being used exclusively for business purposes.
We would therefore advise ensuring the room used in your home for business purposes also has some personal usage, such as a laundry room, games room etc.
Please contact the Tax Department at DRG if you would like to discuss the use of home claim further.
