Running a Business from Home

Introduction

If you're running a business from home as a sole trader or partner, you can claim a portion of your household costs against your taxable profits. This includes expenses like heating, lighting, and council tax—either using actual costs or HMRC's simplified flat rate method. You'll also need to consider permissions, insurance, and whether you might need to pay business rates or Capital Gains Tax.

Permissions you may need

Before you start trading from home, check whether you need permission from:

• Your mortgage provider or landlord – many mortgage agreements and tenancy contracts restrict business use
• Your local planning authority – particularly if you're making major alterations to your property
• Your local council – for example, if you expect high numbers of customers or deliveries, want to display business signage outside your home, or need a specific licence for your type of business

Insurance considerations

Your standard home insurance policy may not cover business activities. This means equipment, stock, or incidents involving customers visiting your premises might not be insured.

You should contact your home insurer to check your existing cover and consider taking out separate business insurance if needed.

Claiming expenses for business use of your home

As a sole trader or business partner, you can claim a proportion of your household costs as allowable expenses in your Self Assessment tax return. This reduces your taxable profit.

What you can claim

You can claim your business share of costs including:

• Council tax
• Heating and electricity
• Phone calls and broadband
• Mortgage interest or rent (proportionate to business use)

Two methods for calculating expenses

You have two options for working out your claim:

1. Actual costs method

You can calculate the actual proportion of costs relating to your business. For example, if you use one room out of five exclusively for business, you could claim 20% of relevant household bills.

2. Simplified expenses (flat rate)

HMRC offers a simplified method based on the number of hours per month you use your home for business. You don't need to calculate actual costs or keep as many records.

The flat rates are fixed amounts you can claim each month based on hours worked from home. This method is often easier for smaller businesses or those just starting out.

Capital Gains Tax when you sell

If you use part of your home exclusively for business, you may need to pay Capital Gains Tax on that portion when you sell your property.

Normally, your main home is covered by Private Residence Relief, meaning you don't pay Capital Gains Tax when you sell. However, any part of your home used solely for business may not qualify for this relief.

This doesn't affect you if you simply work at your kitchen table or use a room that's also lived in by your family. The key word is "exclusively"—a room used only for business.

Business rates

In addition to your normal Council Tax, you might have to pay business rates on the part of your property used for business.

Whether you need to pay business rates depends on whether the Valuation Office Agency (or local assessor in Scotland) has assigned a rateable value to part of your home. This would happen if, for example, you have converted a substantial area exclusively for business use.

If you do have to pay business rates, you'll still pay Council Tax on the rest of your property.

Small business rate relief

If your property receives a rateable value of £15,000 or less, you may qualify for small business rate relief, which can significantly reduce or eliminate your business rates bill.

To check whether you need to pay business rates on your home business, contact the Valuation Office Agency (or your local assessor in Scotland).

Health and safety

Even though you're working from home, you still need to manage health and safety as you would with any business premises. This includes conducting risk assessments and ensuring your workspace is safe for you and anyone else who may visit for business purposes.

Whether you own or rent

The tax reliefs and simplified expenses work the same way whether you own your home or rent it. The key difference is in what you're claiming:

• If you own your home: you can claim a proportion of mortgage interest (not capital repayments), council tax, and utilities
• If you rent: you can claim a proportion of your rent, council tax, and utilities

In both cases, you can choose between the actual costs method and simplified expenses.

The Capital Gains Tax consideration only applies if you own your home and use part of it exclusively for business.

Keeping records

Whichever method you use to claim expenses, you should keep records to support your Self Assessment tax return. If you use actual costs, keep bills and calculate your business-use percentage. If you use simplified expenses, keep a record of the hours you work from home each month.

Sources

• Run a business from home
• Self Assessment tax returns
• Simpler Income Tax: simplified expenses
• Tax when you sell your home
• Business rates
• Apply for business rate relief

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.