Living over the shop

22 September 2005
Living over the shop

The problem
Mixing business with pleasure has always created problems, and nowhere is it truer than in the property world. For restaurant owners with living accommodation attached to the restaurant, there will be implications as far as the taxman is concerned, especially where there has been a change to the property which sees a larger proportion used either for accommodation or business.

The law
Where restaurant owners live in accommodation attached to the restaurant, the Inland Revenue requires them to make explicit in their tax return what proportion of the accommodation is used for business purposes. On the basis of these returns, calculations will be made as to what tax liabilities are due in relation to the property.

Expert advice
The rules surrounding a residential property and a commercial or business property are different, and the tax liabilities that each incurs differ markedly, but normally these won't be realised until the property is put up for sale. In the case of residential property there is normally no capital gains tax liable on any profit made on the sale of the "home". This isn't the case for commercial properties, and in ascertaining what tax might be due, owners will have to be able to distinguish the proportions of the overall property that are put to residential and commercial use.

It's generally preferable to keep the ownership of such premises in the name of the owner rather than in a company. This will help protect the residential side as a separate entity rather than it being rolled into the commercial business and losing its identity. In turn, this should make it easier to avoid any tax charges that might otherwise have been incurred in relation to the property.

Check list

  • Make sure, so far as possible, that areas are kept exclusively for either business or private use. While that distinction may sometimes become a little blurred, for example, an entrance hallway or a garage, every reasonable effort should be made to make that distinction for tax purposes.

  • Make sure, so far as possible, that any receipts show a direct relation to a particular area of the house. For example, if there are any home improvements and repairs taking place, try to make sure that the receipts clearly show that they relate either to personal or business accommodation.

  • Where there is likely to be some overlap between private and business use, try to agree a private use percentage in advance with the Inland Revenue. If necessary, amend this on a regular basis so that maximum benefit is obtained. Remember there may be a trade-off between claiming items against business profits and having to pay capital gains tax on sale.

  • When seeking to estimate private-use percentage, remember that there may be parts of the building, such as outhouses or garages, which might be overlooked as contributing to the business-use percentage of a building.

  • Seek to ensure that what is known as business premises is actually used as business premises and vice versa if it is used solely on a private basis. Otherwise, your ultimate capital gains tax charge could rise significantly.

  • Try to agree the best possible balance of a private-use agreement.

Being honest about the uses of a property will pay dividends in the long run, even if individuals feel they may be losing out in the short term. Should owners neglect to make a reasonable distinction between personal and business use in their tax return, they could wind up paying unnecessary tax or be penalised with a fine equivalent to the amount of tax the Inland Revenue considers they should have paid.

Put simply, it's not worth trying to befuddle the issue when taxes are involved. If property owners are in doubt as to how they should classify parts of their premises, or how to evidence the various expenses allocations, they should seek professional advice.


Gillian Wrigley French Duncan 0141-221 2984
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