Will I Pay Capital Gains Or Corporation Tax?
In this post accountant Giuseppe Colombi considers questions about garden office tax relief; capital gains tax for sole traders and corporation tax for limited companies.
NB A garden office used for domestic purposes such as a home study for children is a domestic building and would not incur capital gains tax or corporation tax.
Garden offices and capital gains tax for the sole trader
What is a capital gains tax?
A capital gains tax is a tax on the profit realized on the sale of an asset by a private individual that was purchased at a lower cost than the amount realized on the sale.
The rate of tax payable depends on a number of factors and on the year the asset is sold.
Most business premises or premises used for business purposes are liable to Capital Gains Tax. Therefore a garden office bought for business use may be liable to capital gains tax when sold, but it’s unlikely……
In practice when the main house is exempt from capital gains tax but the garden office is not, because it is used for commercial purposes, you may have to calculate the profit made on the sale of the office.
So a proportion of the sale proceeds may have to be allocated to the garden office to calculate the profit realized.
If the garden office belonged to a sole trader who bought it solely for his business, at the time of sale the sole trader would incur capital gains tax.
Remember that for tax purposes the sole-trader is an individual owner who for income tax purposes would be taxed in the same way as someone who is not in business.
However, please note the following extract taken from HMRC website under ‘private residence relief’:
Using your home for business purposes
You might work at home, running your business from there. You can still get the full amount of the relief as long as you keep using all of your house as a home. For example, the room you use as an office may also be used as a guest bedroom.
If any part of your home is used exclusively for business purposes, you’ll have to work out if there’s any Capital Gains Tax to pay. For example, if part of your home is used as a joiner’s workshop.
So as long as the office has a dual purpose, for example as a gym or hobby room as well as an office, the owner should be able to avoid capital gains tax.
Garden office purchase and Corporation tax
If the garden office is bought and then sold by a Limited Company the profit is a chargeable gain subject to Corporation Tax. However, if a new office is purchased when the business moves this would be offset against corporation tax using an adjustment known as Roll Over Relief.
Giuseppe Colombi is an accountant with over twenty five years experience and owner of Best Choice Accountancy Ltd. He has a friendly, practical style and removes the stress of accounts, tax and deadlines, helping you focus on building your business. He enjoys sharing his knowledge of business, accounting and tax with business owners like you, small companies, contractors and freelancers.