Advisers and their clients who move to a more permanent working from home arrangement are leaving themselves open to a potential capital gains tax bill, according to George Bull, senior tax partner at RSM.
Under long-established rules, if a room in a house is used exclusively for work, any capital gain made on the sale of the property will incur a tax bill.
FTAdviser recently reported that working from home on a more regular basis is likely to become a feature of the financial advice industry.
Mr Bull said: “There isn’t a huge amount of case law on this because for so long working from home was a rarity, but in recent years it became quite normal for people to work from home one day a week, and now quite normal for people to work from home all of the time.
"The sale of a residential property is not normally libel for capital gains tax, but if you use one room, say, just for work, then the proceeds of the sale of that room, are potentially liable for CGT.”
For example, if an adviser or client has a home office, and this office takes up 10 per cent of the total area of the house, and when the house is sold it generates a gain of £100,000, 10 per cent of the gain would be liable for capital gains tax.
But if a spare bedroom with a desk is temporarily used as a workspace whilst the employer’s office is not accessible this would not restrict the private residence relief available on sale.
Mr Bull added: “If a room is used for both business and non-business purposes, this will not reduce the relief available on sale.
"People temporarily working from home should consider their workspace set-up. Is the room they work from dual-purpose, and therefore not subject to CGT, or is it solely an office, potentially creating a CGT liability?
“For people experiencing more permanent changes to their working arrangements, beyond the pandemic, the advantages of permanently designating an area solely for work purposes need to be weighed against the potential CGT cost.
"Employers too should recognise employee concerns about these issues and be prepared to respond in an informed and sympathetic manner.”
The Treasury is in the process of reviewing CGT in relation to individuals and smaller businesses, having asked the Office of Tax Simplification to consider the overall scope of the tax and the rates which apply last month.
The review will also look at the reliefs, exemptions and allowances which apply to the gains tax, and, some claimed, could spell the end of private residence relief.