If a director (or employee) is working at home a licence agreement can be agreed upon for the company to use part of the home and any outbuilding on a non-exclusive basis.
A formal agreement should be documented and held on the company’s records to ensure transparency and compliance. Even if the company is operated by a single individual, it is important to record the arrangement in the board minutes.
The agreement must reflect fair market value and should not exceed it. Under this arrangement, the director effectively becomes the company’s landlord and charges an agreed rent for the use of part of their property.
This setup allows the director to offset a proportion of their rental expenses, council tax, utility costs and other running costs against the rental income received from the company.
Whilst mortgage interest can no longer be treated as a rental expense, basic rate tax reducer (20% tax relief) is available on mortgage interest costs. You cannot include the capital element of any mortgage payments.
The director must declare both the rental income and associated expenses on their personal tax return. If the rent income changed to the company is equal to the home expenses allocated to the business, and you are a basic rate taxpayer, no additional personal tax would be payable. However, you could also consider setting the rent at a higher level, as long as this is not above fair market value. Rents charged above fair market value would not be allowable for corporation tax purposes.
If the agreement specifies non-exclusive use of the property by the company, it will not impact the director’s eligibility for Capital Gains Tax Principal Private Residence (PPR) Relief. However, if the licence grants exclusive use to the company, PPR Relief may be proportionately restricted.
Basis for calculation
The portion of your home costs allocated to business use is likely to be below fair market value, so setting rent at this level is unlikely to raise concerns. However, if you intend to charge a higher rent, you should obtain evidence of the fair market value for comparable space, usage, and location. This will help demonstrate that the rent remains reasonable. Be sure to document your rationale and supporting information thoroughly.
The allocation of the expenses must be done on a reasonable basis. This is not defined, but you must feel confident to you can justify the rent you charge the company and the expenses you are claiming as a deduction. This should be documented.
Once you have determined the typical monthly home costs, our suggestion for apportioning these is as follows:
- Total home costs are split between number of adults residing in the property. This is then your share of the costs
- Average number of hours worked from home each week are taken as a percentage of total hours in the week (168 hours)
- For larger homes a further reduction should be considered, based on space used for business
- We suggest the percentage is restricted to a maximum of 25%, above this may be considered excessive
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
