If you’re a business owner, you might be considering ways to reduce overhead costs, like rent, by converting part of your home into a commercial space.
Many Owner Managed Businesses (OMBs) in the UK are choosing this path. But before you get too far into the renovation plans, there are a few tax implications to consider, particularly around capital allowances.
In this article, we’ll use an example of a husband-and-wife team looking to convert their home basement into a salon and break down how they can potentially secure tax relief for the refurbishment costs through capital allowances, and what other legal and tax-related aspects they need to consider.
Don’t have time? Here’s the wrap-up of this article in less time it takes to eat a taco 🌮
▪ Renovating a home to use as a business space raises complex tax questions, especially around capital allowances.
▪ Capital allowances can be claimed if the company incurs the costs and has a legal interest in the property.
▪ Fixtures that become part of the property, like heating systems or solar panels, may not be eligible for relief unless proper legal steps are taken.
▪ Note that SDLT, capital gains tax, and benefit-in-kind charges are potential risks that need to be managed.
▪ Proper structuring, like creating a lease or exclusive licence, may open up capital allowance claims.
▪ Non-tax issues such as business rates, insurance, and legal permissions should also be addressed. n.b. Stay Sharp, Stay Savvy and Keep Winning.
Skip right to…
- Tax Implications for Renovating Your Property for Business
- 1- Can Your Company Claim Tax Relief on Renovations?
- 2- Free-Standing Equipment vs. Fixtures: What Qualifies?
- 3- Structuring the Business to Qualify for Capital Allowances
- 4- Tax Risks and Challenges to Watch Out For
- 5- Non-Tax Considerations: Legal, Financial, and Operational Aspects
- Conclusion: More Than Just Tax Relief
Tax Implications for Renovating Your Property for Business
1- Can Your Company Claim Tax Relief on Renovations?
The husband and wife in this scenario own a company that operates as a hairdresser and beautician. They are looking to convert their home basement into a salon, and they want their company to claim tax relief on the renovation costs.
What Does the Law Say About Capital Allowances?
Section 11 of the Capital Allowances Act 2001 states that capital allowances can be claimed if a company incurs capital expenditure on plant and machinery for a qualifying activity. However, for a company to claim capital allowances, the key issue is ownership of the plant and machinery (P&M).
2- Free-Standing Equipment vs. Fixtures: What Qualifies?
Free-Standing Equipment
Items like salon chairs, mirrors, and other equipment that can be moved are straightforward. These are treated as plant and machinery, meaning the company can claim capital allowances (like the Annual Investment Allowance and First Year Allowance) as normal.
Fixtures: The Bigger Issue
However, problems arise when considering fixtures like solar panels, electrical systems, and heating systems—assets integrated into the building. By law, these fixtures become part of the property, which is owned by the directors personally. In this case, the company doesn’t own the fixtures and therefore, can’t claim capital allowances on them.
3- Structuring the Business to Qualify for Capital Allowances
There is a way around this: S176 of the Capital Allowances Act 2001 allows a company to claim capital allowances on fixtures if it has a legal interest in the property. This could be achieved by granting the company a lease or an exclusive licence to occupy the basement before the renovations begin.
▪ A lease would give the company a legal interest in the property, allowing it to claim capital allowances on qualifying fixtures.
▪ An exclusive licence could also work, but HMRC is strict in treating exclusive licences as leases, which could create Stamp Duty Land Tax (SDLT) implications.
4- Tax Risks and Challenges to Watch Out For
While acquiring a legal interest in the property resolves some issues, it also opens up others:
Stamp Duty Land Tax (SDLT)
HMRC requires a deemed market value transfer on the land transaction, meaning SDLT may apply. This is particularly relevant if a formal lease is granted.
Capital Gains Tax and Private Residence Relief
Using part of the property exclusively for business purposes affects Private Residence Relief. The basement portion would not qualify for this relief upon the eventual sale of the property.
Benefit in Kind (BIK)
Assets like solar panels could create a benefit-in-kind charge if they benefit the private part of the home. Directors may be taxed on the value of these assets if the company is deemed to have enhanced their personal property.
5- Non-Tax Considerations: Legal, Financial, and Operational Aspects
In addition to tax issues, the husband and wife need to think about the broader impact of their decision.
▪ Loan Agreements: If a mortgage exists on the property, they must notify their lender.
▪ Local Authority Permissions: Any structural changes to the basement may require approval from the local council.
▪ Business Rates: Changing part of a residence to a commercial property could trigger business rates.
▪ Insurance Requirements: The couple should ensure their home insurance policy covers the commercial use of part of the property.
Conclusion: More Than Just Tax Relief
What seems like a simple idea of converting a basement for business use involves many complex tax and legal considerations. While the couple may be focused on securing tax relief through capital allowances, they should also weigh the potential costs of SDLT, capital gains tax, and the risk of a benefit-in-kind charge.
For those considering a similar route, careful planning and professional advice are key.
At OMB Connect, we help you navigate these tricky waters and ensure you make informed decisions that set your business up for success—without falling into costly tax traps.