Home Office Extension

Newsletter issue - November 07.

Where you run your business from your own home pressure can soon build up on your personal space. You may consider building an extension to your property, or installing a separate office in the garden, but there are significant tax implications.

The part of your home that is used exclusively for the business will not qualify for exemption from capital gains tax (CGT) when the whole property is sold. If the current area is used both for personal and business activities there is no problem with CGT as the area is not used exclusively for business. However, if the intention is to use the new extension (or garden office) entirely for business, we need to calculate the potential CGT bill on sale. The withdrawal of taper relief from 6 April 2008 means the net gain on the business part will be subject to CGT at 18%, assuming tax rates remain the same.

Where your business is run though a company there could be a benefit in kind charge on you as director, if the company pays for the house extension. This can be avoided if you lease the part of the property used for business to the company for its exclusive use.

The building cost is also likely to carry VAT. Where your business is VAT registered it could reclaim the VAT as a business expense, if the cost of the whole building project is entirely born by the business, and HMRC are convinced that this cost relates to business rather than private use of the property. There is a potential VAT charge where the business use ceases or the house is sold. HMRC may demand VAT on the written down value of the office extension. If the value is close to nil then VAT is not usually a problem.