Does using a room in your home exclusively for work result in a capital gains tax bill (CGT) when you sell your home, but that this rule can be dodged by keeping private possessions in the room. Is this correct?
You’re probably aware that profit (gains) made from selling your home qualifies for so-called private residence relief (PRR) . However, there are circumstances where the relief might not apply to the whole of the gain. One of these is where part of your home is used for business purposes. This rang alarm bells for you, a company director, who found out about the potential tax trap just as you were converting a large room in your home to an office.
Misleading articles
You were handed a copy of an old newspaper article which explained the trap and claimed that it could be avoided if the room was not used “exclusively” for business (the exclusive use rule). It suggested exclusivity could be prevented by keeping personal possessions in the room. Since then you’ve read a number of articles which say the same thing.
Confused advice
While the articles are correct that using part of your home for business can mean that part of any gain you make from the sale of the property is liable to captial gains tax (CGT), it doesn’t apply in your situation. The articles make the common mistake of confusing two tax rules.
The “exclusive use” rule
The CGT PRR rules in question are often misquoted. Only where part of your home is used exclusively for business from the time you acquired the property until it’s sold does the exclusive use rule apply. Where there’s change in use of part of your home, e.g. where it was used as your home and later as your office a different rule applies.
The change of use rule
The other rule which can affect PRR merely requires that the relief is to be “adjusted” (reduced) to reflect any non-residential use of part of your home. Exclusivity of use is not mentioned, so using part of a home for both business and private purposes doesn’t prevent your entitlement to PRR being affected.
Trap. Where the “change of use” rule applies PRR is reduced even where the business use of part of your home is not exclusive.
Trap. Even in circumstances where the exclusive use rule is a factor, HMRC’s long-standing and not unreasonable view is that merely keeping personal possessions in a room is not sufficient to prevent the loss of PRR.
In practice
Although you were caught by the change of use rule and therefore your entitlement to PRR might be adversely affected by business use of part of your home, there’s good news. Tip. HMRC takes a practical approach when applying both the exclusive use and change of use rules. For employees and directors it generally accepts that use of a single room as a work study will not reduce PRR.
HMRC doesn’t accept that keeping personal possessions in a room otherwise used for business prevents it from counting as exclusively used for business. But this rule doesn’t apply if the room etc. has been used for domestic purposes at any time. HMRC will generally accept that use of one room for work will not lead to a CGT bill.