Introduction

As a sole trader working from home, claiming allowable expenses is a great way to reduce your tax bill. But did you know that doing so might affect the tax relief you get when selling your home? Here’s a guide on the benefits and potential pitfalls of claiming home office expenses and how it impacts Principal Private Residence Relief (PPRR) in the UK.

What Are Allowable Home Office Expenses?

Working from home enables sole traders to claim a range of allowable expenses, either directly for business or apportioned based on business use. These include:

• Direct Business Expenses – Costs exclusively related to your business, like office supplies, dedicated phone lines, and business insurance.
• Apportioned Home Office Expenses – Shared costs, like heating, electricity, internet, mortgage interest, and rent, based on the percentage of your home used for business.

There are two ways to claim home office expenses:

• Flat Rate Allowance: HMRC allows you to claim a flat rate based on hours worked at home each month. It’s simpler and doesn’t affect PPRR.
• Actual Costs: Alternatively, calculate a percentage based on the space and time used for business, which might yield a higher claim but could impact your PPRR.

How Claiming Home Office Expenses Can Affect Principal Private Residence Relief

When you claim a portion of your home for business, you’re technically designating it as a business area, which can impact your PPRR. Here’s why:

1. Loss of Principal Private Residence Relief (PPRR) for the Business Area

PPRR offers relief from Capital Gains Tax (CGT) when you sell your main home. But if part of the property is used exclusively for business, HMRC considers that section as a business asset. As a result:

• You may lose PPRR for that area, meaning if 10% of your home is a business office, 10% of the gain in property value could be subject to CGT when you sell.
• Example: Let’s say your home appreciates by £100,000 in value. If 10% was exclusively a business area, you could pay CGT on the £10,000 portion related to the business area.

2. Maintaining Dual Use to Protect Full PPRR

One way to retain full PPRR is to ensure no part of your home is exclusively for business. By using the space for personal purposes outside business hours, you preserve its status as part of your main residence. This may include:

• Using your office as a guest room or study in non-business hours.
• Ensuring personal items are present in the space.

HMRC generally allows business expense claims for dual-purpose areas, meaning you can still deduct costs without risking your full PPRR.

3. Choosing the Flat Rate Allowance for Simplicity

If you’re concerned about CGT exposure, the HMRC flat-rate allowance for home-based work is a simpler option. It doesn’t require space apportionment, so there’s minimal impact on PPRR. However, the allowance might be lower than what you’d claim through the actual costs method.

Capital Gains Tax Calculation on Sale

If part of your home is subject to CGT, here’s what happens:

• The CGT liability will apply to the portion of your home that was exclusively business-used, based on the period of business use compared to the total period of ownership.
• In practice, this means CGT is calculated on the gain in value for the portion and time used for business, relative to total ownership.

Key Takeaways

Claiming home office expenses is valuable for reducing taxable income, but it’s essential to be aware of how it impacts your PPRR. To balance tax savings with relief retention:

• Consider dual-use of the space to protect PPRR.
• If in doubt, opt for the flat-rate allowance to avoid CGT implications.
• Keep accurate records for all expenses, calculations, and use of space, as HMRC may request these during an audit.

Final Thought

Claiming home office expenses can be beneficial, but understanding the interplay with PPRR is essential to make an informed choice. If you need further guidance, consult your accountant or get in contact with us to help navigate these deductions effectively.