Capital gains tax liability from a home office?

I have been putting the finishing touches to my home office and it is clear that I am not alone in ditching the daily commute in order to be able to go to work in my slippers.

However one question that does come up is what is the capital gains effect of a home office? Most people are aware that gains on the value of your house are exempt from capital gains tax under principal private residence rules and the general fear is that by using part of your house in your business you can lose this.

The first piece of advice you will get down the pub is not to claim for any tax deductions for the household costs, the theory being that if you don’t claim these reliefs that are available to you, you will not be penalised on your capital gains tax. This is not the case however the legislation states that if you use part of your home exclusively for business you’ll lose a proportionate amount of the exemption, it makes no mention of any interaction with income tax deductions.

The key is the word exclusively, so setting up a workstation on the dining table will have no affect on your capital gains tax position. A dedicated office like mine however could be more problematic. To make sure there are no CGT effects, I make sure it is available for non-business uses, my wife has a computer on one end of the desk for her personal use and when friends come to stay the room is available for the erection of a travel cot, there is also washing permanently drying in the corner as it is the only room I will heat during the day.

The potential pitfall to this approach is that the legislation refers to ‘part of your home’ with no specific mention of rooms so you need to make sure that the personal use is throughout the general area of the office and no area of it can be said to be exclusively business.

The other approach is simply not to worry as the apportioned gain may well be covered by personal exemptions anyway. For example if a house is a sold with a gain of £300,000 having been owned for 15 years and for 10 years a dedicated office used 10% of the area (the garden can also be included in the apportionment calculation), this would lead to a taxable gain of £20,000. If the property is owned by a married couple this is coverd by their CGT exemption and no tax is payable as long as no other cpital gains are made in the same period.

So with that sorted all I need to worry about now is which draw to put my paperclips in.