Employer-Provided Living Accommodation – When is it a Taxable Benefit and How is it Taxed?
The provision of living accommodation to an employee can potentially be a taxable benefit. The rules discussed below also apply to living accommodation provided for a member of an employee’s family or household by reason of their employment.
The way that the benefit is taxed depends on whether the accommodation is job-related or non-job related, as well as other factors relating to the accommodation itself.
Where job-related accommodation is involved, there will be no charge to tax in the following circumstances:
- The job-related accommodation is ‘necessary’ for the proper performance of the employee’s duties (e.g. caretakers on call outside normal working hours or agricultural workers who live on the farm).
- The job-related accommodation is provided for the ‘better performance’ of the employment duties and it is customary in the industry for employers to provide living accommodation to employees (e.g. hostel wardens or managers of a public houses living on the premises).
- The job-related accommodation is provided by the employer because there is a threat to the employee’s ‘security’ due to the type of work they conduct.
Non Job-Related Accommodation
If an employee receives living accommodation which does not fall within the meaning of job-related accommodation, a taxable benefit may need to be calculated.
The way in which the benefit is calculated will depend on whether the employer is renting the accommodation or if the employer owns it.
- Rented Accommodation:
Where the employer rents the accommodation, you need to calculate the ‘cash equivalent’ which is the higher of:
a. The rent actually paid by the employer; and
b. The ‘annual value of the property’.
This ‘annual value’ is the rent which might reasonably be expected to be obtained from the accommodation if the tenant paid all of the usual household bills and bore the costs of the repairs and maintenance. The annual value may be apportioned if the accommodation is not available for the full tax year.
Employee contributions will also need to be deducted to give the cash equivalent of the benefit.
Please note that this method should only be used when the employer is renting from another landlord.
There are different rules, which have not been considered in this article (e.g. where a lease premium is paid for a lease of less than 10 years) but feel free to contact us if you would like to discuss this further.
- Employer-Owned Accommodation
Where the employer owns the accommodation, you still need to calculate the annual rental value.
If the cost of providing the living accommodation does not exceed £75,000, the benefit will be the difference between the annual rental value and the ‘sums made good’ by the employee. Therefore, you need to look out for any employee contributions and get tax advice on this point.
If the accommodation cost the employer more than £75,000, an additional benefit needs to be calculated (called the additional yearly charge) which will be added to the annual rental value to give the taxable benefit.
To calculate the additional yearly rent, you must use the original cost of the accommodation (including any improvements) and deduct £75,000. This value will then need to be multiplied by HMRC’s official interest rate for the relevant tax year.
The ‘Six Year’ Rule
If the accommodation was acquired by the employer more than six years before it was provided to the employee, you will use the market value at the time the property was first provided to the employee and not the original cost. You also need to consider if any capital improvements have been made to the accommodation as this may also need to be taken into account.
However, if the original cost of the accommodation is not more than £75,000, there will not be additional yearly rent, regardless of the market value. Apportionment of these calculations are required if the accommodation is not available to the employee for the whole year.
Where an employer pays for the household bills (such as electricity and gas) or provides furniture to the employee, this will be an additional and separate taxable benefit.
HMRC have brought in a number of changes to how employer-provided living accommodation is taxed when none of the exemptions apply. We therefore recommend seeking professional tax advice.
Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before determining the tax due on any benefit in kind.