Directors of limited companies can claim the standard use of home allowance of £312 per year but this is rarely a true reflection of the costs incurred.
As a director of a limited company, whether you spend a proportion of your time working from home or your home is your permanent workplace, the amount you are able to claim from your business is a common area of uncertainty and one that we often discuss with our clients.
In the above circumstances, claiming the basic use of home allowance is by far the simplest option.
Use of home allowance:
The use of home allowance allows you to claim a flat expense of £312 per year (£6 per week) from your company without the requirement to keep supporting records to justify the figure.
However, in many (if not most) cases, this amount is not a true reflection of the costs incurred, especially where the majority of a director’s working hours are spent at home. When a proportion of heat, light, repairs, mortgage interest and council tax are considered, it becomes clear that £312 does not come close to the real cost. These scenarios are where a business use of home agreement may be suitable.
Use of home agreement:
The agreement effectively allows you as the director to charge the company rent for the use of your home. This is possible as your limited company is a separate legal entity to you as an individual.
The amounts paid are an allowable expense for the company and taxable rental income for you as an individual. This taxable rental income needs to be reported on your personal self-assessment tax return and can then be reduced by a proportion of certain household expenses, and often the expenses will almost match the income leaving no Income Tax payable.
It is important that the amount of rent charged is at an appropriate market rate, and a formal agreement is required to be put in place between the director and the company.
The value of a use of home agreement often outweighs the costs of putting one in place, and an idea of the potential tax savings can be calculated prior to the agreement being made. Careful consideration is required around setting up an agreement due to the potential capital gains impact. The private residence relief can be lost for any parts of the property exclusively used for business purposes.