Charging your business rent
When you run your own business, a very tax efficient strategy is to charge your business for the costs of you working from home.
Whilst the documentation required is slightly different if you're trading as a sole trader or partnership rather than a limited company, the calculations involved are broadly the same.
So what do you need to be aware of? Well, we recommend you take the following steps:
- Work out what the actual annual running costs of your home are - you can include mortgage interest (or rent), maintenance, gas, electricity, council tax, service charges, cleaning and insurance.
- Identify what proportion of these costs relate to the area of your home you use for business - a simple way to do this is to count the number of rooms in your home (excluding kitchen and bathroom) and then identify how many rooms you use for business and what proportion of the time you use them for business.
Let's take an example - assume you have 5 rooms in your home (excluding bathrooms and kitchen) and you use 1 of them 50% of the time for business - so the calculation is 1/5*50% = 10%.
- Apply the percentage you calculated in step 2 to the costs you calculated in step 1. So if your total costs a year are £20,000 then you can claim up to 10% of these costs ie £2,000.
By the way, we give our clients a helpful template to complete to calculate the rent they can charge - if you'd like a copy, feel free to give us a call.
And just a few additional points to note:
- If you work from home and you don't want to go through the steps above, you can just charge your business £4 a week (as at May 2016) or £208 (or you can use the simplified expenses rate if you're self-employed - see more about this here)
- From a personal tax perspective you will be receiving rental income - but as long as the costs of this are equal to the income there will be no taxable profit and so no tax to pay
- Don't use any room in your house 100% of the time for business as this could lead to capital gains tax problems!
- Double check the amount you are charging with local market rents for similar office space and usage - this will ensure you are not significantly overcharging your business
- If you are trading as a limited company it's best to draw up a licence agreement between you and the company (and also a dividend minute and resolution agreeing the licence)
And what's the benefit of doing this?
Well, as a sole trader you'll save tax on the rental charge equal to your marginal rate of tax and if you're a limited company you'll save corporation tax at 20% (current rates as at May 2016) as well as being able to withdraw this money tax free from the company.
If you have any questions, or would like any help on any other topics, feel free to email me at [email protected].