Can a Self Employed person offset their mortgage interest & Council Tax against tax?

[Zak33]

HI people

Having found these links
http://www.independent.co.uk/news/bu...rc-856994.html

http://www.qck.com/hmrc-offers-tax-r...ed-158466.html
which state

Self-employed can set mortgage costs against tax, says HMRC

I have totally failed to find the correct phraseology/statement on the HMRC website .pdf's

If a self employed person works from home, can a percetage of the INJTEREST and COUNCIL TAX be offset against profit and income to reduce tax liability?

Some normal costs and charges can, such as the perecentage of heating bills, telephone bills etc, that are fair and correct for working from home.. but can the interest on the mortgage and can the council tax?

[abaxas]

To quote the indy (from above link)..

"There was a fear that if you took mortgage interest as an expense, it could put your house in jeopardy of being free of Capital Gains Tax (CGT)."


It appears you can, but at a huge risk. If this was from a company they'd call it a 'bait and switch'.

[scaryjim]

I'd be amazed if you can, tbh, as neither of those expenses increase due to you working at home. Certainly when I started self-employment I did a couple of HMRC courses and they never mentioned offsetting CTAX or mortgage interest. It'd definitely be something I'd want to take legal / financial advice on before trying it! EDIT: That said, it was a couple of years before those articles were written that I went self-employed, and there's every chance that the rules have changed again in the 2 years since those articles were written!

You can, however, offset an amount of your fuel costs, phone bill, ISP charges etc against income tax, as those obviously do increase if you're working at home rather than being out in an office all day.

[Phage]

Under Australian law....Yes. But you have to demonstrate that you have a seperate office/studio/workshop that is identifiable from the rest of the residence. CGT would be levied on that proportion of the house when you sell for the period that you used it for.
I'd be surprised if the UK was very much different.

[Steve]

Phage's comments closest represent what I understand to be the case, although I speak from the perspective of rental fees, and am unsure if the same applies to mortgage interest. I'm also interested as to what the implications are for council tax, seeing as I pay so flippin' much on the thing.

[DR]

the UK works like this.

Pay taxes - feed the country
Feed all those without jobs
and if you are in trouble tough luck since you or your spouse may well earn money.

The country doesn't help you at all if you've managed to earn any money to feed anyone ever at all.

Yes, it sucks a lot.

[TheAnimus]

hey at the same time a portion of the mortgage is effectively for the business, surely you have a home office room?

If so rent out that room, you can use the rent a room tax scheme for your personal liability.

[Bugbait]

Yes and no. Yes, you can do it but you may not want to. Once your property becomes part of your business it may be subject to CGT. If the premises is also your primary residence then you can only offset the portion that is related to the "office" as others have mentioned. Depending on the size of your property and the proportion used for the office it may or maybe not be worthwhile. Example: If you have 5 primary rooms and only one is used for the office then you can only claim 20% towards expenses. You have to weigh this against potentially loosing your CGT (free) benefits on your primary residence. I personally choose not to do it to preserve the CGT benefits on my primary residence.

[scaryjim]

... The country doesn't help you at all if you've managed to earn any money to feed anyone ever at all. ...

Apart from this isn't true, because if you have been working full time for more than 2 years you'll have enough NI contributions to claim basic Jobseeker's Allowance, regardless of your partner's income (n.b. capital exemption limits do apply, but if you've got enough capital for them to come into play I've got little sympathy ). And if you're sick and incapable of work there are several different levels of non-means-tested benefits that you're eligible for. It won't be as much as you were earning, of course, but it's a damn site better than a kick in the teeth.

[b0redom]

Just claim a use of home as office. It's completely allowable, doesn't effect CGT, and doesn't add anything to your tax bill. Talk to your accountant.

[Bugbait]

Just claim a use of home as office. It's completely allowable, doesn't effect CGT, and doesn't add anything to your tax bill. Talk to your accountant.

What expenses are you claiming under that though? What you've said is essentially correct but my accountant warned against how much is actually claimed which is what can affect CGT on your property (in the context of a Limited Company anyway). I only claim a (very) small fixed amount each week based on the advice of my accountant.

[b0redom]

Yeah, I think it's somewhere in the region of £300/year. I don't recall precisely. I certainly wouldn't suggest claiming council tax and mortgage interest. I would have thought trying to claim council tax would also leave you open to a whole world of pain, as you'd need to repurpose your domestic address as a business address?

I'd check with your accountant though, that's what they're paid for....

[Bugbait]

Yeah, I think it's somewhere in the region of £300/year.

We're on the same page then . The amount I was given was £520 p.a. or £10/week per contributing employee/worker.

[peterb]

I'd get professional advice if ypou are unsure - but this may help

http://www.hmrc.gov.uk/incometax/relief-household.htm

This applies if you are self employed - if you are running a limited company from home, then any offset would be against corporation tax.

[Saracen]

...

If a self employed person works from home, can a percetage of the INJTEREST and COUNCIL TAX be offset against profit and income to reduce tax liability?

The answer on both counts is yes .... but it's a can of worms.

Yes, you can claim a portion of both, but there are provisos and conditions. Essentially, a portion of the house has to be "wholly and exclusively" for the purposes of a business. For quite a long time, that was interpreted as meaning you couldn't use that part of the house for non-business purposes because if you did, it wasn't "wholly and exclusively". However, that's been clarified by HMRC to mean that at the time it's being used for business, it's "wholly and exclusively" for business.

By inference, therefore, if you set aside an office and work in it 9-5 (less 1 hour lunch), 5 days a week, then that's the business use. So the week is 24*7 = 168 hours. Those working hours are 7 hours a day, 5 days a week, so 7*5 = 35 and therefore the room is 35/168 used for business, which is 20.8%.

But if the wife is in the room some of that time surfing the web on her machine, or the "office" is a corner of the lounge and the kids are playing there, then it isn't "wholly and exclusively".

Then, what proportion of the house is the office? Do you do it by room, or by square footage? What do you include in the total .... hall and stairs? bathroom, kitchen, garage?

There's essentially two ways of doing this. One is to come up with a flat figure, a "reasonable" weekly rate, agree it with HMRC (if you can get them to agree it) and charge that. But it'll probably be less than you might claim. Another is to do detailed calculations .... and adjust them every time interest payments (for example) go up or down.

But .... anything you claim as a deduction is at risk of being challenged by HMRC ... and up to several years later. If they challenge the basis of your calculations, you are either going to end up accepting their version, or fighting it, perhaps with it going to a tribunal, and perhaps with the attendant accountant's charges that might be incurred in winning your case. And if you don't win, you will end up paying back some of the deductions, and probably accumulated interest, and depending on quite how you did the calculations and the exact nature of the information you gave to HMRC, possibly penalty charges as well.

The biggest single problem is that so much of this is based not on detailed and clearly explained law, but on interpretation of HMRC rules, both by them and by you .... and on possible disagreements in those interpretations.

Put it this way, if you don't claim it, you might overpay tax but you can't be accused of underpaying it.

If you do claim it, you might end up having arguments over it. And if you do, it's that can of worms I mentioned, especially if it starts putting whether part of the property should be classified as business use for Council Tax purposes, or if it raises Capital Gains issues over part of the house (which, in fairness, is probably not likely).

I won't advise you on what to do, but I will tell you what I decided .... and have done in more than 25 years of being in exactly that situation. I decided that while I might be missing out on a reduction in my tax bill, the potential for huge hassle further down the line meant I'd rather forego that reduction than risk the hassle. If, repeat IF I had claimed it and it had blown up in my face, I'd have to factor in the time I spent sorting it out, which I decided was more profitably spent earning a living in the first place. In other words, for me at least, it just wasn't worth the complications it could cause. But you'll get differing opinions on that. Some accountants think it's worth doing. Some don't. I don't, not for me anyway. It's just my value judgement though.

[cptwhite_uk]

Saracen: Concise, and to the point. Excellent advice, as always.