How to claim your Home Office costs against your tax billFirst Published: March 2012 | Available in: Property Articles Your Property Network
Most landlords and small property developers run their property business from home, and not from commercial premises. As a ‘property rental business’ (the HMRC term for a BTL portfolio) is just that – a ‘business’ – some of the costs of running your home can be claimed as a tax deduction to reduce your income tax bill.
This article provides a definitive guide as to what costs can be claimed – and a handy ‘Home Office Calculator’ on our website allows you to produce a fully-supported claim to include in your year-end accounts.
Expenses typically incurred by property investors are either: fixed costs and variable costs.
1. Fixed costs
These costs are payable, whether or not there is any business use of the home. Examples include council tax, mortgage interest, insurance, water bills, and general repairs. This is not an exhaustive list!
The calculation of the amount of fixed costs to be apportioned to the rental business is based on the proportion of the home used for business purposes. For example, if there are 4 bedrooms, and two reception rooms, with one bedroom used to run the rental business from, then one sixth of the total fixed costs of the home are allowable as a tax deduction.
Note – this method is a way of estimating the proportion of the home fixed costs that can be claimed based on the proportion of the home actually used for business purposes. This may need adjusting up or down depending on the size and layout of the home – obviously a mansion and a studio flat will produce very different figures, so judgement is required to review the basic calculation to produce a fair allowance that HMRC will agree.
Some specific points about certain items:
- Insurance – any separate business policy is fully allowed, otherwise a proportion of the household policy can be claimed
- General repairs are allowed e.g. roof repairs & exterior redecoration. If a repairs relates solely to a room not used for business, the cost is fully disallowed (and vice versa – a repair solely related to the room used for business is fully allowable)
- Mortgage interest – only a proportion of the home mortgage interest is allowable – you can’t ‘rent’ the home to your property business in full! And, interest on any borrowings that are solely to buy property are disallowed – but CAN be included in the finance costs for THAT property
Capital Gains Tax
Unless a room is used solely for business purposes, there is no exposure to CGT by claiming a Home Office cost. Therefore, to ensure this, the Home Office Calculator caps the deduction at an appropriate limit (say 90%) so that there remains some non-business use of the ‘business room’, and so Private Residence Relief fully covers any capital gain on sale of the home. Business rates are not chargeable where a ‘business room’ is not used 100% for business use.
The Home Office allowance is restricted to the actual use of the home as an office during the tax year i.e. if the rental business begins halfway through the year, then only half of the allowance can be claimed for that year.
2. Variable costs
Some costs do change depending on the amount of business use. For example: heat, light, telephone & broadband, and cleaning.
A claim is possible based on ‘the facts of the usage’. This is a HMRC term, meaning that a claim is allowed depending on what your specific circumstances are, and must be ‘reasonable’. For example, if you have a cleaner, consider asking for the bill to be split between the ‘business room’ and the rest of the home. This allows the business room element to be fully allowable.
Some specific points about certain items:
- Telephone / broadband – all business telephone calls are allowable. A reasonable proportion of the fixed cost of the line/package can be claimed, to the extent that the telephone/broadband is used for business purposes (be sensible!). Note – Sky TV is not allowable!
- Consider a dedicated/separate landline/mobile phone for business use to enable a 100% business use claim to be made – if that makes financial sense for you!
Use of a letting agent
Note that if a letting agent is used to manage a property portfolio, the proportion of home costs to be claimed is reduced. This is a specific point that HMRC will enforce. See your accountant for details of how that may affect the amount of costs to be claimed in your circumstances.
One of the benefits of being ‘self-employed’ as a property investor is that there is more scope to claim costs against taxable profit – for example, it is not possible for an employee to claim a Home Office Allowance if they work from home. Where fixed costs are incurred anyway – like home mortgage interest – there is a real benefit to claiming these costs, since the costs would be incurred anyway, and so to that extent it is a ‘free’ tax deduction – which is obviously well worth having!