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What is the impact on capital gains tax of setting up a home office?

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As more people have been working from home over the past few months – and a number of employers are looking at extending home working when the pandemic is over – a question I am being asked more frequently is “What is the tax impact of using part of my home for work purposes?”

One of these is that working from home could have a negative impact on the capital gains tax (CGT) consequences for individuals when they sell their homes.

However, as is always the case with tax, the rules are far from straightforward.

In most cases, where an individual sells their main home, any gain will be fully exempt from CGT because they can claim main residence relief (MRR). However, where they use a room or area of the home solely for business purposes, that part of the gain will not be exempt from CGT, so the relevant proportion of the gain could still be chargeable. This tax charge on sale may come as a surprise to some homeowners; one they had not budgeted for.

What can be done about it?

If a room is used for both business and non-business purposes, this will not reduce the relief available on sale. For example, if a spare bedroom with a desk is temporarily used as a workspace whilst their employer’s office is not accessible, this would not restrict the MRR available on sale.

People temporarily working from home should consider their workspace set-up. Is the room they work from performing a dual-purpose, and therefore not subject to CGT, or is it solely an office, potentially creating a CGT liability?

For people experiencing more permanent changes to their working arrangements, beyond the pandemic, the advantages of permanently designating an area solely for work purposes need to be weighed against the potential CGT cost. Employers too should recognise employee concerns about these issues and be prepared to respond in an informed manner.

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