In order to build or purchase a garden office through a limited company, directors must take into account a number of tax-related matters. In this article, we’ll talk about the tax repercussions of having a home office and how having a garden office might change your tax situation.
This article will discuss:
Tax Implications for Company-Paid Garden Offices
- Corporation Tax Relief for Garden Offices
- Capital Allowances for Company-Paid Garden Offices
- Value-added Tax (VAT) Implications
- Benefit-in-kind (BIK) Tax Implications
- Business Rates and Home Office Proportion
- Capital Gains Tax (CGT) Implications for Using a Garden Office
Explore tax deductions with our guides on capital allowances, managing VAT returns, claimable home office expenses, and understanding Capital Gains Tax to optimize your garden office investment.
Other Issues for Building a Garden Office
- Insurance Implications for Garden Offices
- Planning Permission for Home Business
- Mortgage Considerations for Building a Garden Office
Tax Implications for Company-Paid Garden Offices
If a company covers a garden office’s expenses, it must consider the effects of the taxes and allowances listed below.
Corporation Tax Relief for Garden Offices
The company can cover the full cost if the garden office is used for business purposes. For corporation tax purposes, the company cannot deduct the cost of the building, as HMRC considers it to be a capital expense rather than a revenue expense. This is because the building is expected to be used reasonably and will provide enduring benefits to the business, making it ineligible for immediate tax relief. Despite being movable, a garden office is considered a structure from which the business operates rather than equipment.
Consequently, neither the expenses for a self-built garden office nor the purchase price of a pre-built office can be deducted from your business profits. This includes all design, planning, construction, and initial decoration costs.
However, ongoing running costs such as heating and lighting expenses are eligible for tax deduction. Water rates can also be deducted if the water supply is separately metered from your home.
Additionally, repair expenses, including costs for redecoration, are also tax-deductible.
Capital Allowances for Company-Paid Garden Offices
One of the primary ways for businesses to receive tax relief for long-term asset acquisition costs is through capital allowances. Plant and Machinery (P&M) assets are typically eligible for capital allowances. If an asset meets the Annual Investment Allowance (AIA) criteria, a business can claim 100% of the asset’s cost in the first year, subject to an annual limit. However, not all assets qualify for AIA.
Structures and buildings are one asset class that does not qualify for capital allowances since they are not considered P&M but are instead viewed as the location or setting in which a business operates. Therefore, it is impossible to claim capital allowances for the costs of a garden office. Furthermore, the newly introduced Structures & Buildings Allowance (SBA) cannot be claimed for the garden office’s expenditures since the building is residential property, and structures that serve as dwellings are not eligible for relief.
Even if you argue that the space will be used solely for commercial purposes, HMRC may challenge it by claiming that you intended to use the property for residential purposes. As a result, if you want to take advantage of this allowance, you must purchase or lease a piece of land where the structure will be constructed, which can lead to Stamp Duty Land Tax (SDLT) and other legal issues.
The good news is that fixtures and fittings are eligible for tax relief through capital allowances, allowing you to claim for expenses such as furniture, curtains, shelves, etc. A tax reduction is available for adding power, including electrical wiring, lighting fixtures, and heating. Thermal insulation is also acceptable even though it was initially built.
Value-added Tax (VAT) Implications
Reclaiming VAT can significantly impact building costs. VAT incurred on the construction of the garden office or its furniture and furnishings can be recovered if it is used solely for business purposes. However, VAT cannot be reclaimed if a company director uses the office for personal use.
In cases where the office is used for business and private purposes, only the business proportion of VAT can be claimed based on a fair and reasonable apportionment. It is advisable to seek advice from a tax expert when using the VAT flat-rate scheme. Notably, a home-based employee cannot recover VAT costs when building a home office and incurring all the expenses.
Only VAT-registered businesses can recover VAT. To find out more about VAT, go to our VAT Guide.
Benefit-in-kind (BIK) Tax Implications
Benefit-in-kind (BIK) tax applies when a company or employer covers a director’s or employee’s personal expenses, such as paying for their loft or garage fees. If a company pays for a garden office used for private purposes by other family members or in other ways, it will result in a BIK charge. It may restrict other business allowances as the property must be solely used for business purposes.
A benefit-in-kind fee would apply if an employer paid for a garden office, but the employee or other family members also used the space for personal matters. Additionally, as the property must be used solely for commercial activities to qualify for tax relief, such private usage may result in restricting other allowances for the company.
To comply with tax rules and regulations, employers and employees must be aware of these tax ramifications.
Business Rates and Home Office Proportion
If you use a portion of your garden or home office for business purposes, you may be required to pay business rates. Business rates are calculated based on the rateable value given to your home by the Valuation Office Agency. It is advisable to contact the Valuation Office Agency during the project planning phase to determine the business rate implications. It is important to note that council tax will still be payable for the part of the home office used for domestic purposes.
To avoid any surprises or unexpected expenses, it’s recommended that you contact the valuation office agency during the planning phase of your project to understand the business rate implications. This can help you budget for business rate costs and ensure that you comply with all relevant regulations.
Capital Gains Tax (CGT) Implications for Using a Garden Office
When you sell your only or main residence, you are entitled to a full-time tax exemption known as Principal Private Residence Relief (PPR), meaning you don’t have to pay Capital Gains Tax (CGT) on any gains made. This relief, however, can be limited if a portion of your house is used solely for commercial operations. In this case, you will need to apportion the gain just and reasonably, and only the office portion will be liable to CGT.
It is essential to keep in mind that if you use your garden office for something other than business, you will not be liable for Capital Gains Tax but you will be subject to the Benefit-in-Kind charge. The kind of garden office you create can influence the CGT you may have to pay. There won’t be a CGT issue if the office is a movable construction that can be installed elsewhere. Alternatively, you might value it separately if it is a permanently installed structure and will be sold with the primary property; any rise in value will be subject to CGT. The gains from the sale may be mitigated by your capital gains annual allowance.
The availability of PPR on any income from the sale of your property is, therefore, a crucial factor to take into account when setting up a home office.
Other Issues for Building a Garden Office
Moreover, there are various other factors that you should consider that may affect your decision to construct a garden office.
Insurance Implications for Garden Offices
It’s important to be aware that building a garden office can affect your home insurance. Therefore, contacting your insurance provider and informing them about your plans before construction is advisable. They can advise you on any adjustments you need to make to your current policy or whether you need to buy more insurance.
You can have peace of mind and use your new space stress-free by taking the time to carefully explore the insurance implications of constructing a garden office. By doing this, you can ensure that you are completely insured in the event of unforeseen occurrences.
Planning Permission for Home Business
To operate a business from your home, it may be necessary to obtain planning permission. You might need to apply for a licence depending on the nature and type of your business. Therefore, seeking advice from your local authority before proceeding with your plans is highly recommended.
Fines, legal action, or the need to completely demolish the garden office could come from failing to get the necessary planning approval or license. As a result, it is advised that you speak with the local government to confirm that you have obtained all required permissions and clearances before beginning any building work on your property.
Mortgage Considerations for Building a Garden Office
It’s important to let your lender know about your plans if you plan to add a garden office or use a portion of your house for commercial reasons, as this could affect your mortgage.
You must first speak with your mortgage lender to learn more about their rules and specifications for setting up a garden office and using a piece of your home for a business. You might need to ask for a mortgage variation or even consider remortgaging your house to make sure that your aims are correctly taken into account in your mortgage agreement.
Takeaway – Considerations for Building a Garden Office Through a Limited Company
While it may seem like a good idea to construct a garden office through your limited company, there are complexities involved, and it’s important to seek proper advice before making the purchase. An alternative option is to fund the construction personally and then charge rent to the company for using the office space.
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