Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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July 2003

Q:

Have any recent developments taken place in the tax world in connection with working from home?

A:

There have been a few recent developments worthy of note.

Household expenses

The Government recently acknowledged the increasing trend of employees working from home under flexible working arrangements by introducing a tax exemption, albeit only a small one.

From 6 April 2003, payments by employers to cover “reasonable additional household expenses” incurred by employees since that date in carrying out their regular employment duties at home are exempt from income tax (and National Insurance contributions). Employers can pay up to £2 per week without supporting evidence of the costs incurred. Above that level, the exemption is still available, but the employer must provide supporting evidence of the relevant additional household expenses incurred. Note that the exemption only applies to additional household costs (e.g. extra heating and lighting used for work), and only to the extent that the employer contributes towards the cost. It does not apply to tax relief claims for household business expenses borne by the employee.

This exemption is basically a measure to reduce record keeping requirements. Tax relief has always been available for expenses incurred “wholly, exclusively and necessarily” in the performance of an employee’s work duties. The new legislation merely enables small payments to be made by the employer (up to £104 per year) without some of the problems that can arise with the Inland Revenue when tax relief is claimed for household expenses.

Use of home for business

A gain made on the disposal of an individual’s only or main residence is normally free of capital gains tax (CGT). However, this exemption is restricted to the extent that any part of the home is used exclusively for business purposes. A CGT liability therefore arises on that part of the home, subject to possible relief if appropriate (e.g. taper relief and the annual CGT exemption, currently £7,900).

Taper relief is generally available for assets used in the owner’s trade, or in a partnership of which the owner is a member. It is also available to assets used by any unquoted trading company (i.e. whether or not the asset owner is otherwise connected to the company). However, for disposals of assets from 6 April 2004, the relief is extended to an asset used in a trade carried on by any individual, or by any partnership whose members include an individual. This may be useful, for example, if one spouse owns the family home, but the other spouse uses part of the home exclusively for business purposes.

Taper relief restriction

Maximum ‘business asset’ taper relief of 75% generally accrues after two years. So in the case of a home used 90% residential and 10% exclusively for business, a gain of £200,000 may be expected to attract ‘principal private residence’ exemption of £180,000, with £20,000 liable to CGT. Assuming that full business asset taper relief is available, one would expect the taxable gain to be reduced to £5,000 (i.e. £20,000 less 75% taper relief). Unfortunately, the Inland Revenue are understood to take a different, and less favourable, view.

For taper relief purposes, if an asset has been used for business and non-business purposes, any gain on disposal is apportioned according to the asset’s use. Taper relief is then calculated at the business asset rate on the business proportion of the gain, and at non-business asset rates on the non-business proportion. ‘Non-business’ asset taper relief is much less favourable, with no relief for the first two years’ ownership, and then 5% per annum thereafter, up to a maximum of 40% after ten complete years.

Based on the above example, the Inland Revenue apparently take the view that the chargeable gain arises on the whole house, so that the £20,000 gain should be apportioned 90% business and 10% non-business use. If the house has been owned and so used for slightly more than two years, the position becomes:

(a) Business asset taper relief – taxable gain £500 (i.e. £20,000 less 75% taper relief)

(b) Non-business asset taper relief – taxable gain £18,000 (no taper relief due).

The total taxable gain is therefore £18,500 (i.e. £18,000 plus £500), compared to only £5,000 on the original basis of calculation. So if it is possible to avoid using part of the home exclusively for business purposes, it may well be worthwhile doing so.

Mark McLaughlin

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