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Business in the house

If you use your home for a self-employed business, you may claim some of the running expenses - heat, light, perhaps mortgage interest and council tax - as a business expense. This saves you income tax and NIC every year. It's important to consider whether it might cost you CGT when you sell, because a part of a house which is exclusively used for business is not exempt as your 'only or main residence'.

Some people argue - sometimes successfully - that you can 'have your cake and eat it'. You claim the income tax deduction year by year, but you tell the Inspector that no part of the building is exclusively used for business. Sometimes it's an office, sometimes it's a spare bedroom. This should avoid any question of a CGT charge, although it is open to the Inspector to argue that you should not claim so much as an income tax expense. Sometimes they do, often they don't.

The 75% taper relief for sale of business assets seemed to make this a very minor problem anyway. If 10% of your house is used for business, and you make a gain of £200,000, you would expect £20,000 to be chargeable because of business use, reduced to £5,000 because it's a business asset owned for over 2 years. Unfortunately, the Revenue take a different view of how this works, and they have recently confirmed that it is their official policy. They say the £20,000 chargeable gain is a gain on the house as a whole, and only 10% of that is a business asset - so only £2,000 of the chargeable gain gets the 75% taper. The other £18,000 only gets the much less generous 'non-business' taper, and you are more likely to have a gain in excess of your annual exemption.

Confused? Many accountants have been surprised by this argument, because 'it's the same 10%'. But the law almost certainly works the way the Revenue suggest. It's probably still better to claim the income tax relief now, but you have to be aware of the possible CGT problem later.