If your company is based from your home you may wish to consider formalising an arrangement with your company to rent part of your residence to the company to occupy for business use. The benefit of this is that by charging the company rent, the company’s corporation tax bill will be reduced.
What do I need to do?
You cannot charge your limited company rent unless there is sufficient evidence of the arrangement so you will need to set up a formal rental agreement between yourself and the limited company. This is straight forward to do and templates are readily available. You should also ensure that you have a Board Minute recording the agreement. Providing the rental agreement clearly sets out that the company will not have exclusive use of that part of the home then this arrangement will not create capital gains tax implications if you sell the property in the future.
How much rent do I charge?
The rent that is charged to the company should be reasonable and justifiable and not in excess of commercial market rental values of serviced office space – research these locally. Also, bear in mind that if the amount of rent charged to the company, which then is subsequently paid to you, exceeds the household costs that you have personally incurred for that area of space you will be taxed on the difference which is regarded as rental profit. If you want to avoid this, the rent that you receive from the company should equal the costs paid by you.
Firstly, calculate the annual costs of running your home and consider the following expenses:
• Rent or Mortgage Interest
• Council tax
• Water rates
• Light and heat
• Repairs or re-decoration of home office
The rent charged should include use of all services that are provided to the company from the home but be careful with telephone costs. If you are utilising a private residential telephone line, you can only claim the cost of the business calls. You cannot claim the cost of line rental as this will be treated as a benefit in kind on which you will pay tax. HMRC argue that the line rental would have been paid anyway without business use as it is already installed for your own private use. If you have a separate business line installed, in the name of the company, then all costs are allowable and VAT can be reclaimed as usual.
If the broadband account is in the company name and any private use is not significant then there is no taxable benefit for internet usage. If the account is personal then you may only claim a proportion of the bill based on your business usage.
A simple example
Say that the total running costs were £14,000 per year. You will need to proportion these costs based on the amount of space occupied by the company. This can be done based on the number of rooms within the property or the total floor area of the household. Either method is acceptable providing you use the most accurate method based on all circumstances, such as the size of the property and the number of rooms within it. Adjustments also need to be made based on the amount of time that the room is utilised by the company.
Bob runs his company from a spare bedroom within his house five days per week. The house has a total of six rooms, all the same size. The costs would be apportioned as follows:
£14,000 ÷ six rooms = £2,333 per room.
Usage is five out of seven days so the costs are reduced by £2,333 x 5/7 = £1,666
£1,666 is the annual rental charge to the company for the year and the company’s profits are reduced by this amount which also reduces the corporation tax liability.
Bob will also need to record enter £1,666 rental income onto his personal self assessment tax return but he will not be taxed on this amount because the associated costs of running the home of £1,666 are also entered onto the tax return so the profit to Bob is nil.
This is a very simplistic example and your accountant will be able to help you based on your specific circumstances.
Directors should also ensure that their mortgage lender or landlord permits the property to be used for business purposes and that the household insurance is not adversely affected.