Schoolwork, Cash in the Attic and Tax Liabilities – How Working From Home Could Result in Unintended Tax Liabilities
Many of us are privileged and are able to work from home (WFH) during the current crisis. As a result, a large proportion of us are now well aware that WFH has many implications and we've all read articles about the importance of routine, a good breakfast, etc. However, there are also a number of fiscal consequences and your tax return may look a little different next time as a result of this prolonged period of WFH (and that will be subject to another blog!).
Council tax or business rates?
As individuals, we pay council tax whereas businesses pay business rates. Typically, an office worker who takes some work home at the end of the day or at the weekend would not be in danger of paying business rates. Similarly, selling goods occasionally from home via an internet site, again, should not be problematic. However, selling goods or services to people who visit your home (for example, the hairdresser who works out of their kitchen), might (depending on the volume of visits) arguably result in you being liable to pay business rates.
But what of the yoga, singing or normally peripatetic music teacher who is being paid for teaching classes over Zoom? Arguably, they are now conducting a business from their home and so could potentially be liable for business rates, although it is to be hoped that the government and councils will not take this point.
Cash in the attic and Capital Gains Tax (CGT)
If, instead of WFH, you've deep cleaned your cupboards and are ridding yourself of some surplus stuff (typically with a value of, say, under £100) then those sales should have no tax consequences. However, if you find the family heirloom in the attic, which is worth many thousands of pounds, then you could be looking at a reportable CGT liability – although of course, do remember your CGT annual exemption.
Also consider the volume of sales and how you conduct them, as those might increase the risk of you being considered a trader and having to report your trading profits. Remember the WW1 case of Mr Rutledge who, on a business trip to Germany, purchased one million toilet rolls, sold them and was held to have been carrying on a trade – quite simply one million toilet rolls are not for personal use/enjoyment.
What about that home office and Stamp Duty Land Tax (SDLT) rates?
Even if you have the luxury of being able to turn one of the rooms in your house into an office with office style furniture, work resources including better lighting, and only use that room as an office, that does not mean that when you come to sell your property you will have changed the status of your property from purely residential to mixed use. In other words, your buyer will still be subject to the residential SDLT rate regime when they buy your property. This has a current maximum top rate of 15% (and that’s before taking into account non-resident SDLT, which will add a further 2% to a non-resident buyer's SDLT bill). By contrast, mixed use or commercial rates of SDLT have a top rate of 5%. HMRC guidance is however, clear on this point and so there is no benefit from a SDLT perspective of banning the children/spouse/civil partner, etc. from using your home office.
Homework and CGT
Indeed, there may well be an advantage to making your children use your home office for their homework! If a property is your main home – your principal private residence (PPR) – then it is possible, on the sale of your property, to claim exemption from CGT in respect of any gain that arises from the growth in value of the property during your ownership. The issue is, that if any part of your property is used exclusively for business purposes, then part of any gain made on a disposal might attract CGT. This is a question of fact.
Exclusive business use is not wise from a fiscal perspective, but even if it does occur, remember that the PPR rules are not a ‘cliff edge’, but based on the proportion of non-domestic use to commercial use. Also remember that there may be the possibility of off-setting your CGT annual allowance of £12,300 and if you are married (or in a civil partnership), then potentially £24,600 of gain may be sheltered.
Annual tax on enveloped dwellings (ATED)
If the property is owned by a company or other non-natural person (NNP) then, in addition to the 15% flat rate of SDLT paid on the purchase of a property with a purchase price of £500,000 or more, ATED has to be paid.
There are a number of business exceptions to both of these taxes (SDLT and ATED) although utilising one of the rooms in the property as an office is unlikely to mean that the company that owns the property can claim relief from ATED.
Property owning companies carrying on a trade (or property rental business) can claim relief from ATED where the property is bought for an employee of that company who occupies and uses the property as their home. An important condition is that the premises have to be made available to the employee (and that term includes a director) solely or mainly for the trade or business of the company (or group company). There is, however, a complex rule which in summary says, if the employee can share in 10% or more of the profits of the company then the relief won't apply.
For most of us, WFH for a few weeks will not cause any particular issues other than whether we have enough tea bags in the cupboard or whether our broadband connection is fast enough, but a change in our tax liability could be a potential unintended consequence and one that should be borne in mind.
The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.