Home working and Capital Gains Tax (CGT)

Newsletter issue - January 2022

Working from home was slowly becoming more common before the Covid-19 pandemic; however, the various lockdown restrictions meant that it increased exponentially in 2020 and 2021. Many employees have indicated that they do not wish to return to the office full-time, and employers appear to be willing to acquiesce to requests for hybrid working patterns. As a result, working from home is likely to be here to stay. Much of the tax related guidance surrounding homeworking that has come to the fore in the wake of the pandemic relates to what deductions can be made for income tax purposes, and what can employers pay to employees in respect of working from home without triggering a tax bill. However, it is far less well-known that there can be CGT considerations as well.

A house is a chargeable asset for CGT purposes. If it is sold for more than it was bought for, a chargeable gain can arise. Where the house has been the only home of the owner throughout the period of ownership, principal private residence relief (PPR) will usually be available to offset the gain completely. As a result, most people don't even think about CGT when selling their home. However, a problem can arise where part of the house has been used otherwise than as a home, including in the course of an employment.

Where this is the case, HMRC may reduce the available PPR on a just and reasonable basis. Where this reduction leaves a taxable gain in excess of the available annual exempt amount (or if the annual exempt amount has already been used by other gains in the year) there will be a tax bill on the gain. Additionally, because the gain is not fully covered by PPR the seller will need to complete a UK property reporting service return and make a payment on account of the tax within 60 days of completion. Furthermore, as residential property is subject to higher rates of tax than other gains an unexpected bill can come as a nasty shock.

There is a relatively simple way to avoid the loss of relief - which is to avoid using any part of the house exclusively for work purposes. So, if the employee uses a particular room to work in, the loss of relief can be avoided if the rest of the family has access to it for their own use, e.g. as a study or reading room. If the employee lives alone, the same protection can be secured by ensuring the room chosen is a multi-use room, or by setting up the workstation in a room that already has other use, e.g. the living room.