October 26th, 2012 / Insight posted in

Office at home leads to tax bill

MG writes: I am self-employed and have my office at home. In the early 1990s I was advised by the tax office that I could charge up to 30% of my mortgage interest as a business expense without risking capital gains. Now it seems that capital gains are avoided if my office is not used exclusively for business, yet I can only charge mortgage interest as a business expense where the office is used “wholly and exclusively” for business. I have recently moved and assumed, in quadrupling my mortgage, that I could continue to subsidise my mortgage payment in this way.

By claiming a part of your mortgage interest as a business expense you have exposed yourself to a potential capital-gains-tax liability. This is because the business proportion of your property will fall outside the principal-private-residence exemption. In your case 30% does seem high for one office but it depends on the size of the property. Whether it was a good decision will depend on the increase in value and the resulting chargeable gain. However, it is possible to roll over the gain you have made on your original property into an office in the new property and thereby push the potential tax liability into the future. The business percentage of the new property may be different.