The most common question we get is how much of my home can I write off when I work from home.
In this article, we go into more detail about the upsides and downsides to writing off a portion of your home.
Before that, a little about Finmo – our story just in case you’re interested.
Now, to get to it.
Your home and household bills
The question comes up a lot. Can I write off part of my rent or mortgage if I work from home.
The answer is most likely yes.
As a sole-trader, the complication comes when calculating how much to write off. HMRC describes two ways to calculate this.
Simplified expenses come into play if you only work from home a few hours a week (to catch up on bills, etc.) or if you pay a very small amount in rent or mortgage. You can learn about the specifics here.
A flat weekly rate is assigned to the time you work from home and is multiplied by the number of weeks you work from home.
Typically, this won’t net you much of an impact to your tax bill, so the more complicated method is writing off a portion of your actual household expenses.
Portion of your rent and household expenses.
The most important bit about writing off part of your household expenses is the word ‘reasonable’. HMRC says, “You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.” More in the working from home section of this HMRC article.
If you’re interested in learning more about how HMRC thinks about expenses, we did an article on Wholly and Exclusively vs. Dividing Costs.
Another example of a formula you can use is:
Total household expenses multiplied by the dedicated space in your home used for work multipled by the percentage of time that space is used for work. So, the calculation:
Add up Rent or Mortgage interest + heating + electricity + Council Tax
(Number of rooms used for self-employed work / Total number of rooms in the house)
Amount of time used for work / (Amount of time used for work + amount of time used for personal use)
To give this more of a real life example. Joan has an extra room she uses for an office. 90% of the time, that extra room is used as an office for her self-employed job, while 10% is used when guests come over. The extra bedroom is one of five rooms (20% of the house) so Joan multiplies her monthly household expenses times 90% times 20%.
Writing off portion of rent or mortgage interest is one of the best ways to save money and decrease the amount of tax you pay.
Finmo works with our Members to find the formula that works best for them.
If you own your home and are writing off the Mortgage interest, then you need to be careful.
Claiming rooms that are used exclusively for business could reduce the Capital Gains Tax private residence exemption when the property is sold. When selling a property, any part of the property exclusively used for business will not qualify for Capital Gains Tax private residence relief. You should ensure there may be uses to your home office other than strictly for business.
In the few examples of HMRC Investigations we have seen, HMRC may throw out the entire household expense. Especially in instances where HMRC deems the expense to be unreasonable.
It is always best to err on the side of caution. Being well informed improves your judgment in the matter.
HMRC has put out a list of examples to reference. These examples detail a multitude of ways to factor in portions of rent or mortgage interest.
Read more here.