Renting home office space to your company
The last few years have seen more of us working from home and although life is slowly returning to normal, many organisations have realised there are many benefits of home working and are encouraging staff to make this change, whether full or part time, more permanent.
Naturally this change in work location incurs additional costs and this is recognised by HMRC with their work from home allowance. Whilst this allowance enables people to reclaim a proportion of the costs of running a home office, it does not allow directors of companies to claim for a percentage of their rent or mortgage interest charges.
To mitigate this, directors are entitled to charge rent to their company for the use of their property, with this then being declared as commercial rent on the directors’ personal tax return and enabling them to also declare a proportion of costs.
It is essential that a rental agreement is put in place between the director and the company so that the director can become the landlord and in turn charge commercial rent. If the rent is charged at the same rate as the costs, then income offsets costs and thus no rental profit needs to be declared. As rental income is not subject to National Insurance many see this as a cost-effective way to release money from your business.
Prior to setting up a formal rental agreement there are some elements that must be considered:
- Will your mortgage provider/landlord allow you to enter into the agreement and how will it affect your home insurance?
- Ensure that the agreement only covers trading hours as it is normal for a home office to be utilised for personal use outside of these hours.
- The proposal to put an agreement in place must be evidenced in the board minutes and cannot be backdated.
- The agreement must be in joint names if the property is joint owned.
- Rental costs may include service charges for a proportion of heating, light and power costs.
- The rental cost must not exceed local commercial rental values, or it may be deemed by HMRC as disguised distributions.
- The director must genuinely work from home and be able to evidence the costs that are being claimed for.
- If you are leasing a substantial part of your property or separate buildings then a formal lease agreement would be more appropriate and this must be drawn up with the help of a solicitor as it would be covered by the Landlord and Tenant Act and would have implications for Capital Gains Tax and Business Rates.
If you have any questions or need some accountancy help, please call us on 01173 700 079 or e-mail firstname.lastname@example.org. You can also book a free 30 minute call with Yarka – https://calendly.com/yarka-ssa/30min