If your business is operated out of your house, you might want to explore formalising an agreement with your firm to rent a portion of your home to utilise for business purposes. The benefit is that the firm’s corporation tax burden will be decreased due to charging the company rent.
What am I supposed to do now?
You won’t be able to charge your limited business rent unless you have sufficient proof of the arrangement, so you’ll need to put up a formal leasing agreement with the limited company. The process is simple, and templates are widely available.
You should also make sure that the agreement is documented in a Board Minute. If the rental agreement specifies that the firm will not have exclusive use of that portion of the house, this arrangement will not result in capital gains tax issues if you sell the house later.
How much do I charge for rent?
The rent charged to the firm should be reasonable and justifiable and should not exceed the commercial market rental prices of serviced office space – do some local research on these. Also, keep in mind that if the amount of rent charged to the firm and then reimbursed to you exceeds the household expenditures you have personally expended for that area of space, you will be taxed on the difference, which is considered rental profit.
To avoid this, the rent you get from the firm should be equivalent to the expenditures you incur. To begin, calculate your annual home operating expenditures, taking into account the following expenses:
- Council tax
- Rent or Mortgage Interest
- Light and heat
- Water rates
- Repairs or re-decoration of home office
All services offered to the firm from the residence should be included in the rent, but telephone fees should be avoided. You may only claim the expense of business calls if you use a private home telephone line. You won’t be able to deduct the expense of line rental since it would be considered a taxable benefit.
HMRC claims that because the line is already placed for your personal use, the line rental would have been paid even if you didn’t use it for business. All charges are permitted, and VAT may be recovered as normal if you have a separate business line placed in the firm’s name.
There is no taxable advantage for internet usage if the broadband account is in the company’s name and any private use is minimal. You can only claim a part of the bill based on your company usage if the account is personal.
Directors should also ensure that their mortgage lender or landlord allows them to use the property for company reasons and that their home insurance isn’t affected. For further information, contact McCarthy Browne.