For those of us sitting comfortably in our chic ‘Shepherd’s Hut’ home office feeling like David Cameron writing his memoirs, there could be a shock awaiting. An interesting article in the Sunday Times Money section raises the question of how the taxman will assess your home office shed when you come to sell your home.
Apparently, accountants are looking warily at the implications of CGT being levied on the garden office when you sell your property.because their new workspace may be viewed by HM Revenue & Customs as a business premise, rather than a place of leisure.
Capital gains tax (CGT) is not levied on the sale of your main home, but it is applied to any part of your home used “exclusively for the purposes of a trade, business, profession or vocation”.
In practice, this means the surging number of Covid-19 “offices” that have sprung up all over the country as working parents desperately attempt to escape their children (or perhaps their spouses) could land home workers with an unexpected tax bill. This is a real worry says Tim Stovold, a partner at the financial advisory firm Moore Kingston Smith. He explains the situation to the Times and how it might affect him as a businessman with a COVID-19 home office. He worries that when his house is listed for sale on Rightmove for example with the home office included in the sales description it could cause ripples. “The tax inspector will also be looking at Rightmove and will write to me and say: ‘Prove that your kids played Monopoly there or we’ll say it’s an exclusive business premise — and you’re going to have to pay CGT on it.’ ” He said, “an awful lot of people are absolutely going to find themselves on a sticky wicket in the coming years.”
The article gives the following example which outlines the problem.:
Take a family who bought a home for £510,000 this year. Next year they convert one bedroom — one-sixth of the house’s living area — into an office, and sell the house for £750,000 in 2028. The CGT bill the family receives is based on one-sixth of the profit they made on the house over the seven years they owned it. If they are higher-rate taxpayers, that means about £6,500.
George Bull, a partner at the accountancy firm RSM, advised home workers to avoid bragging online about their newly built or adapted office space.
“If you set aside a room and say: ‘This is my study, I have a phone in there, a computer in there and I’m keeping it locked from the children’, that is going to crystallise a tax exposure,” he warned.
But is this really going to discourage people from building a home office and furnishing it with tasty gear as we suggested in last week’s blog post? I am sure it won’t. The obvious answer – (and I am not an accountant) would seem to be to let the kids organise a weekly computer game’s night or have your partner host a book club once a month and claim that the Shepherds Hut is for “chillaxing” as well as working.