Garden Offices – Tax Considerations

Garden Office Tax Implications - Lilley and Co

Author: Michelle Watts FCA – Associate Director

With most of the working population working from home right now, many businesses are considering a permanent change to their working environment and we are being regularly asked about the pros and cons of a garden office.

There are two main considerations when looking at installing a garden office on the grounds of your residential property for business use:

  • will it be solely used by the business or
  • will there also be an element of private use (e.g. as a playroom, hobby room or overnight accommodation for guests).

The treatment of the garden office costs, various tax implications and some other additional points hinge on which of those options is chosen. Each individual circumstance may be slightly different, so it’s always good to seek specific advice but the following table outlines the broad considerations, based on a Limited Company purchasing the garden office as a company asset.

 

Consideration

Limited company – 100% Business Use Limited company – element of private use
Treatment of initial cost of structure Costs can be paid in full by the business. The asset will be capitalised and depreciated over its expected useful economic life Costs can be paid in full by the business. The asset will be capitalised and depreciated over its expected useful economic life (see notes on benefit in kind)
Treatment of other associated costs e.g. planning, architect and legal fees Costs can be paid in full by the business. These costs will not be allowable for corporation tax purposes (treated as capital costs) Costs can be paid in full by the business. The private proportion of the associated VAT should not be reclaimed (based on a fair and reasonable calculation)
Corporation tax treatment of initial costs (capital allowances) The cost of the structure does not generally attract capital allowances (and so is classed as not tax deductible). There are certain elements of the build that do attract capital allowances: installation and supply of power, heating, air-conditioning and thermal insulation. New fittings and fixtures within the structure also still benefit from capital allowances in the usual manner. It’s really important to get a detailed breakdown from your builder of the structure costs to be able to support your claims for specific elements of the build cost. As for 100% business use
Treatment of on-going costs Costs can be paid by the company and reclaim 100% VAT on all costs allocated as running costs for the garden office e.g. light and heat and metered water to the building as well as redecoration and repair costs. Costs can be paid by the company but can only reclaim the business proportion of the VAT on all costs allocated as running costs for the garden office e.g. light and heat and metered water to the building as well as redecoration and repairs.
Capital Gains Tax

Capital Gains Tax (CGT) does not usually apply to your primary residence when you sell it. However, it may apply if part of your residence is used solely for business. E.g. if a garden office covers 3% of your total floor area, then 3% of the gain when the property is sold might be subject to CGT. This is a more relevant point to consider if you are likely to be moving house in the near future, but if you plan to be in your current property for a length of time then there is the potential that this would have less of a bearing on your decision e.g. the office may be of low value, already removed prior to sale etc.

As there is no 100% business use, your whole property including the garden office, should fall under the exemption to Captial Gains Tax.)
Personal benefit in kind (P11D) No personal benefit in kind arises – nothing to report on a P11D and no Class 1A National Insurance is payable. It is important to include in an agreement between Directors (as land owners) and the business that there is no private usage allowed of the building and it should be set up clearly only for business use. There will need to be an annual assessment of the personal benefit in kind for the Directors – reported on a P11D and Class 1A National Insurance payable by the company, as well as personal income tax by the Directors. The calculation of the benefit can be complicated but should in principle follow the HMRC guidance for ‘Assets made available without transfer’ – guidance available at www.gov.uk
Business Rates

 

Rates may be assessed on the building if there is 100% business use – you should contact your Local Authority to check this point. Rates will not usually be assessed on buildings also being used for private purposes.
Planning permission Check if you need planning permission for the structure. Check if you need planning permission for the structure

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