Self-employed can set mortgage costs against tax, says HMRC

[stevieb]

Been trawling through the news recetly, and with my selfassesment still to compelte, can i include the following in my allowable expenses now?

http://www.independent.co.uk/news/business/news/se...

Steve

[smartie]

it will be still in the same way you can claim for home electric and gas though, by apportioning how much of your home is used for business and then claiming this same propertion of mortgage interest.

[m4tt]

Seem to remember my accountant mentioning that come sale time it would complicate the CGT position, to the point where I haven't bothered.

<edit>

Just read the article.... Doh!

Edited by m4tt on Thursday 31st July 09:35

[Eric Mc]

m4tt said:

Seem to remember my accountant mentioning that come sale time it would complicate the CGT position, to the point where I haven't bothered.

<edit>

Just read the article.... Doh!

Edited by m4tt on Thursday 31st July 09:35

Not necessarilly. CGT would only arise if a significant portion of the house had been specially converted for business use - such as converting the garage into an office or workshop.
Even then, it would only be that portion of the property that would be subject to CGT - not the whole property.

Obviously, if someone was going the "whole-hog" and carrying out a major conversion like this they would have to clear the "business use" with their local council and would probably end up being assessed for Business Rates too.

[stevieb]

With the recent interest rate rises it may be a little more relief than one once thought..

[animal44]

Wonder if this is retrospective :-)

[Eric Mc]

You can adjust SElf Assessment tax returns going back six years.

Obviously, if you tell the Revenue that you submitted erroneous tax returns for six years you might invite an enquiry. However, it may be worth the effort.

[stevieb]

Eric,

But with mortgages being quiet high and interest payments in the early stages of the mortgage dwarking the capital part. If you apply the same proportions to the tax retun this could skew the expenses a lot.

for the time i spend at home working i allow myself around £5 per week to cover the the utilities (gas/elec/water/phone/internet/maintainence) which i think is fair. which is about 5% of the real costs. If i factor the same proportion into my council tax bill and mortgage interest only it will go up considerably as i have a fairly large mortgage.

If i apply the same proportion to the mortgage and c/tax i come out with a figure nearer £60 per week! This cant be right can it!

[Eric Mc]

The Revenue recommend that you use a "single room as office" basis for apportioning these costs.

What they suggest you do is add up all the domestic running costs of the property - light and heat bills, utility bills, repairs and maintenance and mortgage interest. That gives you the total cost of maintaining the premises.

Next you work out how many habitable rooms there are in the house - excluding hallways, toilets, bathrooms, garages and utility rooms (effectively bedrooms, kitchen and living rooms). Allocate one of these as the "office" (even if no one room is actually used as the office) and divide the total of the premises expense by the relevant fraction.

So, if you have seven habitable rooms and the total domestic costs came to £4,000, the allowed "Business Use of Home" expense would be £571 (£4,000 x 1/7).

Edited by Eric Mc on Thursday 31st July 11:21

[m4tt]

Do you then have to get council approval and pay business rates? What about garages? As I use it for storage and as a workshop for the business, so do I count that and the office as habitable rooms? ie 2/8 in the example above.

[stevieb]

I am still thinking if my mortgage interest would tip it over the edge!

I am thinking of how best to put that in if not i am leaving it out but i will be missing a small bit of tax relief!

[thegetaway]

So what happens if you own a limited company, Can you still offset it?

Thanks

[animal44]

thegetaway said:

So what happens if you own a limited company, Can you still offset it?

Thanks

AFAIK No. The company is a separate legal entity and unless the mortgage is in the company name, this would not apply. Also, in the view of the IR, Directors are employees, not self employed.

[Eric Mc]

In actual fact, the Revenue are not too concerned about this. If the company trades from the home of the director, the company should still be allocated an element of the costs attributed to its occupancy of the premises. After all, if it situated in an office block it would be paying rent and other costs for being there.

I alwys provide a charge for such companies but am careful to ensure that the charge remains reasonable and no one tries to take the proverbial.

I have never had a single case where the Revenue have queried or questioned such a provision in a small limited company set of accounts.

The added benefit is that the director gets a small additional credit to his director's loan account which gives him a little more tax free cash from his own company. Strictly speaking, he should declare this "income" as "rent" in his Self SAsssessment tax return but the Revenue do not enforce this treatment on the basis that they would need to do the same for Sole Traders who make this claim as well.

[LivinLaVidaLotus]

Don't forget you'll attract business rates and it may be against the terms of your mortgage to use the house for business purposes as well.

[PhilLL]

What about if two of you work from home operating separate businesses from the same room? I assume only one of you would be able to offset the mortgage costs?

[Brown and Boris]

LivinLaVidaLotus said:

Don't forget you'll attract business rates and it may be against the terms of your mortgage to use the house for business purposes as well.

I think there is a distinction between a 'home office' and running a business which atracts business rates. As long as you don't use any more services (e.g. trade rubbish collection) or create noise or inconvenience for neighbours (e.g. need a skip, have loads of customers or people turning up, or people coming without appointment) most councils have not regarded a couple of PCs and a desk as business use. I recall Shrewsbury and Atcham council were rattling sabres about it a few years ago but it came to nothing. Hardly consistent with 'green' policy to make people commute when then just have a home office.


Even my insurance company said that a 'home office' where you worked didn't require a seprate contents or builings policy as long as the equipment was consistent with home working and not a full scale business (ie just an odd PC and no stock or expensive equipment).

For the past year I have apportioned council tax based on square footage rather than a room basis as the office I have is quite big (about 25% of the house)and I have apportioned the heating etc based on that footage along with an element of when/how it is used compared to the rest of the house. I have never thought about mortage interest because I don't have a mortage as I think any payment might be seen as 'rent' income and be taxable on my self assessment. Pity they don't allow the 'rent a room scheme' to extend to a home office, they might get more peole doing it for the £3.6-£4K it could bring in.

I do insist the business pays its own share of the wear and tear in the space it exc,usively uses such as decorating, carpets, window cleaning and replacing things that need replacing (for example a leaky radiator last year). I also insist they have their own equipment and don't use ours, so they have a vacuum cleaner, coffee machine, kettle, fans and heaters etc of their own. I may be pushing the boundaries but the business can't live for free or expect to use my stuff and wear it out. If I rented/bought office acomodation elsewhere the business would have all these bills and I don't see why I should pay it for the business, even if it is mine.

[Eric Mc]

LivinLaVidaLotus said:

Don't forget you'll attract business rates and it may be against the terms of your mortgage to use the house for business purposes as well.

Boris is correct. This is only an issue if you need to convert the property to enable you to carry out your business. Using a bedroom as an office will not trigger a Business Rates assessment.

[animal44]

Can anyone point me to the HMRC entry describing this? I've tried searching their website, but cannot find the magic search words...

[Eric Mc]

Describing what?