If I use my personal property for business use, should I create a rental agreement between myself and my limited company?
If you’re a company director running your business through a limited company and work from home, you may be able to rent a portion of your home to your company and claim this as an expense. This arrangement, when done correctly, has notable tax advantages.
Rental income from the business is taxed more efficiently than dividends, especially when reduced by legitimate expenses. The drawback of this arrangement is that the rental income minus a percentage of legitimate expenses must be entered on your self-assessment tax return, which can be fiddly and time-consuming.
Key Considerations When Drafting the Agreement
Realistic Rent and Avoiding Exclusive Business Use:
The rent charged must reflect the market value of the space used for business.
The arrangement must be on an ‘arm’s length’ basis, meaning neither party should gain an unfair advantage. Ask yourself, if you weren't going to receive the money from your company in rent, how much would you realistically pay to rent the space in your home.
The space rented should not be exclusively used for business. For example, an office that doubles as a guest room outside of working hours avoids complications, such as Capital Gains Tax (CGT) when selling the property.
Tax Implications:
Rental income received must be declared on your Self Assessment tax return. You can claim allowable expenses to offset the rental income, but any profit is taxable.
Note that mortgage capital repayments cannot be claimed as expenses, and the £1,000 property allowance is unavailable between connected persons.
Periodic Reviews:
Periodically review the rent amount (e.g. annually) to ensure it remains reasonable.
Multiple Rooms:
While it is common to only rent one room as a home office, in some cases, more than one space may be justified (e.g. an office and a garage for storage).
Calculating Allowable Expenses
To determine the claimable expenses:
Calculate the monthly outgoings for eligible expenses (mortgage interest, council tax, electricity, gas, water, broadband).
Determine the proportion of your home used for business (e.g. one room in a seven-room house = 1/7th).
Adjust for proportional use (e.g. 95% business use and 5% personal use).
For example:
Monthly eligible costs: £1,400 (mortgage interest, council tax, electricity, gas, water, broadband).
One business-use room in a seven-room house: £1,400 ÷ 7 = £200
Adjust for 95% business use: £200 × 95% = £190
Monthly expenses £190
Example for a Higher Rate Taxpayer
Let’s assume a higher rate taxpayer rents space to their limited company at £500 per month, resulting in £6,000 annual rental income. Their allowable expenses total £190 per month or £2,280 annually:
Rental Income
Annual rental income: £6,000
Allowable expenses: £2,280
Taxable profit: £6,000 - £2,280 = £3,720
Tax on profit at 40%: £3,720 × 40% = £1,488
Net income: £6,000 - £1,488 = £4,512
Dividend Income
Now compare this to taking £6,000 as a dividend. Corporation tax is charged first between 19% and 26.5%, then personal dividend tax:
Corporation tax at 19% (lowest rate):
Profit after corporation tax: £6,000 - (£6,000 × 19%) = £6,000 - £1,140 = £4,860
Personal dividend tax at 33.75%: £4,860 × 33.75% = £1,640
Net income: £4,860 - £1,640 = £3,220
Corporation tax at 26.5% (marginal rate):
Profit after corporation tax: £6,000 - (£6,000 × 26.5%) = £6,000 - £1,590 = £4,410
Personal dividend tax at 33.75%: £4,410 × 33.75% = £1,488
Net income: £4,410 - £1,488 = £2,922
Comparison
Rental income: £4,512
Dividend income (19% corporation tax): £3,220
Dividend income (26.5% corporation tax): £2,922
Summary
In this scenario, the rental income option is clearly more tax-efficient than dividends, especially at the higher marginal corporation tax rate. However, rental arrangements involve more administrative work.
Drafting the Rental Agreement
The agreement must be signed by both you and your limited company. Below is a sample agreement for your use:
HOME OFFICE LICENCE AGREEMENT
This agreement is made on [date of agreement] between:
[Company Name] (the ‘Company’)
[Property Owners’ names] (the ‘Property Owners’)
It is agreed that:
The Property Owners jointly own [address of the property] (the ‘Property’).
The Property includes accommodation and contains furniture (‘The Home Office’) which is available for use by the Company and which it is envisaged shall be used by the Company from time to time.
It is agreed that in consideration of its use of the Home Office, the Company shall pay to the Property Owners rent in the amount of £XXX per month, which shall be agreed between the parties and reviewed periodically.
Signed on behalf of the Company:
Position: …………………………………………………
Name: …………………………………………………
Signature: ………………………………………………
Date: ………………………………………………
Signed by the Property Owner(s):
Name: …………………………………………………
Signature: ………………………………………………
Date: ………………………………………………
Name: …………………………………………………
Signature: ………………………………………………
Date: ………………………………………………