Do you work at home? Rent a room to your company!

Do you work at home? Rent a room to your company!

November 13, 2009 by Elaine Clark

If you operate a limited company and work at home, why not rent a room to your business?

Then you can offset the rental against your business profits and reduce your overall tax bill.

So how does this work?

Well there are just a couple of things you need to do to put this in place.

Rental Agreement

You would need to put a rental agreement in place between you, the home owner and your limited company.

Your accountant should have a standard agreement available for you to use. So this will not be an onerous task.

Calculate the rent

The rent that you charge should be equal to the amount that the room in the house costs you.

That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self assessment tax return – just a couple more boxes to complete.

Let’s take an example to show how this works.

Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week but serves as a guest room at the weekends.

Her house has a total of six rooms.

Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to £12,000 for the year.

She calculates the rental charge as follows:

Cost per room = £12,000 divided by six rooms = £2,000.

She uses the office five out of seven days, so charges 5/7th of the room cost to the business.

The rental charge is £1,428 for the year.

Sam is paid this rental from the business.

The business records this as a cost in the company accounts, which reduces its tax bill.

Sam enters the figures onto her self assessment tax return but has no further tax to pay on the amount received from the company.

What Next?

The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to do your own specific calculation.

Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business.

Elaine Clark, www.cheapaccounting.co.uk

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Comments

Just to update this:
CGT is no longer chargeable on a home office, so no-one should be worried about that any longer.

Kitchens and bathrooms are not considered 'rooms' by HMRC.

Re using floor space vs number of rooms in a calculation,
HMRC will accept either. In most cases, the office will be the smallest room in the house, thus a calculation based on number of rooms will usually work out as a better deal.

Good point raised Laurence - but just to add that applies whether or not you rent a room or not. If you are charged business rates they are a business expense.

Just a word of warning, if I may?

The council in your area may decide to reassess your property and start charging business rates on the business element.

Please take advice from a professional in your area with knowledge of how your local council reacts.

Laurence

For a truly accurate result - work on square footage of your home and the percentage you use for your business.

That way there can be no dispute over your calculations.

However do remember that it is an estimate as long as you can justify / document your calculation then HMRC should be accepting of them.

Elaine - does the kitchen count as a room?

Thx Elaine - that's a really handy tip. Will tweet this & also speak to my accountant of course.
Jane

A bathroom would not really count - so your home would be classed as 4 rooms.

I would never suggest 100% usage of a room as you can then run in capital gains issues (some thing to avoid). If it is a bedroom then you are likely to have less than 100% usage to allow for guests.

Agree with your accountant the percentage usage and hopefully they should have a rental agreement as well.

Good luck and glad you found this helpful.

Hi

Great information.

Just one question, which may seem like a silly one - but what classifies as a room? I live in a 2 bed flat with a kitchen, frontroom and bathroom. Is that 5 rooms?

Also, I work out of one of the bedrooms - pretty much 7 days a week. This room is for guests - which I rarely have since starting my own business!! Could I therefore charge 100% of the cost of this room against my business?

This may be a question for my accountant, but I thought I'd try you first since you are so helpful :-)

Kind Regards

Katrina

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