Reclaim unallocated space for Windows partition - extend Windows partition on Mac

What have I missed here? What do I do now to add that 8GB of space to my Windows partition?

You might have not missed out on anything. You can use Disk Utility in OSX to extend the partition to fill that 8GB of space. It won't extend the NTFS partition, but you can extend the OSX Mac OS Extended (Journaled) partition to fill that space. It's a simple Drag to Resize operation. I am attaching a screenshot of the same.

Or better yet, I have another idea. Is it possible for me to make this "Unallocated" space a common partition which both Windows and OS X can use? If yes, which format should be partition be e.g. NTFS and should this be done using OS X Disk Utility or Windows Disk Management?

For a common space between Mac OS X and Windows, it will have to be in a filesystem which is readable by both! And that is MS-DOS (FAT) or ExFAT, but ExFAT won't be read by Windows versions before XP.

NOTE: If you want to use a custom or a paid software / app which would even extend NTFS for you, you will need to use iPartition. It would cost you around £30 I guess! But resizing would destroy your data, so I suggest you do it with the standard Mac OSX Disk Utility.