Why your new dedicated home office could land you with a tax headache

If you have spent the pandemic creating the ultimate home office, you are probably feeling pretty smug. That satisfaction might dissipate somewhat when you try to sell your house, however — and get whacked with a tax bill.

Accountants are warning white-collar workers they are taking a risk, because their new work space may be viewed by HM Revenue & Customs as a business premises, 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.

Tim Stovold, a partner at the financial advisory firm Moore Kingston Smith, says people who, like him, have built a shed in their back garden during the pandemic are particularly at risk.

He paid a company called Green Retreats £27,000 to build him a “study shed” in his garden in Wimbledon, southwest London, just before the pandemic started. It has high-speed internet and heating and is a “no kids” zone.

“When I sell my house it will appear polished and pristine on Rightmove [the property website] and my shed will be billed as an office, because I know that’s what buyers are all looking for in the Covid-19 era,” he said.

“But 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 premises — 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.”

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.

There are ways to avoid the taxman — for example, by making sure it is used for “chillaxing” as well as working. The former prime minister David Cameron said he planned to write his memoirs in his £25,000 shepherd’s hut, but also that his children wanted to use it as a Wendy house and “alternative bedroom”. Under HMRC rules, a room or shed will only be taxed if it has “exclusive” work use, so add a sofa or exercise bike — or just let the children play there now and again.

However, Marc Selby, the head of tax at Laytons solicitors, advises that honesty is the best policy. “If, in fact, it is used exclusively as an office, then you should expect to be taxed as such,” he said. “The eyes of the taxman are wide open.”

HMRC described talk of a tax grab as “scaremongering”. It added: “In the vast majority of circumstances, most people working from a room at home will use that room for both work and domestic purposes to some sort of degree.”

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