Guidance

Company provided living accommodation (480: Chapter 21)

How to tax living accommodation given to employees.

Basis of liability

21.1

Section 102

Subject to paragraphs 21.2 and 21.3 below, where an employee is provided with living accommodation by their employer (or by another person where the provision is by reason of the employment) the employee is liable to tax on the value of the accommodation provided. This also applies where, by reason of an individual’s employment, accommodation is provided for members of their family or household as defined in paragraph 1.22.

Exemption

21.2

Sections 99 and 100

Subject to paragraph 21.3 below, no tax charges for the provision of living accommodation will arise where:

(a) It’s necessary for the proper performance of the employee’s duties that they should reside in the accommodation.

(b) The accommodation is provided for the better performance of the employee’s duties and the employment is one of the kinds for which it’s customary for employers to provide accommodation for the employee.

(c) There’s a special threat to the employee’s security, special security arrangements are in force and the employee resides in the accommodation as part of those arrangements.

Section 314

Where exemption is due in any of the above circumstances it also extends to any tax charge that might arise for Council Tax, water charges or rates reimbursed to, or paid on behalf of, the employee concerned.

21.3

Section 99(3)

Where accommodation is provided by a company for a director of the company or an associated company, the exemption provided by (a) or (b) in paragraph 21.2 above is not given unless the director:

(a) Has no ‘material interest’ (see chapter 1 paragraph 1.10) in the company. (b) Is a ‘full-time working director’ (see chapter 1 paragraph 1.9) or the company is non-profit making or is a charity (see chapter 1 paragraphs 1.13 and 1.14).

Provision of living accommodation ‘by reason of employment’

21.4

Sections 97(2) and 98

Where living accommodation is provided for an employee or for members of their family or household by the employer it’s deemed to have been provided by reason of that employment.

There are 2 exceptions to this. The first is where the employer is an individual and it can be shown that the provision was made in the normal course of domestic, family or personal relationships.

The second exception is where the accommodation is provided by a local authority for one of its employees and the terms of the employee’s occupation are no more favourable than those on which similar premises are made available by the local authority to persons who are not employed by it, but whose circumstances are similar to those of the employee concerned.

The cost of providing living accommodation

21.5

Section 104

The cost of the property is calculated by adding its purchase price to the cost of improvements. The purchase price includes expenditure incurred in acquiring an estate or interest in the property. For example, a premium paid under a lease is part of the cost of the property.

From the total of the purchase price and improvements is deducted any reimbursements made by the employee and any sums paid by the employee for the grant of a tenancy. For example, if the cost to an employer of a property and an extension was £130,000 and the employee reimburses £10,000 to the employer, the cash equivalent of the benefit will be based on the net cost to the employer of £120,000. In some circumstances the market value of the property will be substituted for its cost (see paragraphs 21.6 to 21.8).

Substitution of market value for cost

21.6

Section 107

Where, on or after 31 March 1983, an employee occupies provided living accommodation for the first time and any interest in the property was held by the person providing the accommodation (or by a person connected with the provider of the accommodation) throughout a period beginning 6 years before the date of the employee’s first occupation, the market value of the property at that date (plus the actual cost of subsequent improvements) is substituted for the actual cost of providing the accommodation.

This market value rule applies only if the actual cost of providing the accommodation (including improvements) exceeds £75,000.

21.7

For the purposes of paragraph 21.6 above, the market value of the property is to be estimated on the basis of the price it might reasonably be expected to get in the open market assuming vacant possession and disregarding any option for the property held by the employer, the provider of the accommodation or by the employee or anyone connected with those persons.

21.8

For living accommodation whose provision (including improvements) cost more than £75,000 the effect of paragraphs 21.6 and 21.7 above is for:

  • all occupancies which began before 31 March 1983 the cash equivalent of the benefit is based on the actual cost
  • occupancies which began after 30 March 1983 the market value basis will apply if the provider of the accommodation had held any interest in it throughout the period of the 6 years ending with the date when the employee first occupied the property – otherwise the actual cost basis applies

Where the market value basis applies the market value as at the date of first occupation by the employee will remain the basis of calculating the benefit for so long as the employee remains in residence, subject to the addition of the cost of any subsequent improvements.

Calculation of cash equivalent: accommodation costs £75,000 or less

21.9

Section 105

(a) The cash equivalent of the benefit of the accommodation is the annual value of the property occupied (or, if greater, the total of any rent payable and any amount attributed in respect of a lease premium – see paragraph 21.11) less any rent paid by the employee. From the 2017 to 2018 tax year any amount paid as rent must be paid by 6 July following the tax year when the accommodation was provided in order for it to be classed as a making good payment when calculating the cash equivalent.

Annual value for this purpose is defined in the same way as the annual value which was formerly used for rating purposes. Annual value is the rent the property would fetch if it were let on the open market. The figure taken for Income Tax purposes is usually the same as the gross value for rating purposes which applied before the introduction of the Community Charge.

ESC A56

(b) The annual value of property situated in the UK is taken as follows:

  • England and Wales - 1973 gross rating value
  • Northern Ireland: 1976 gross rating value
  • Scotland: 1985 gross rating value divided by 2.7. Thus a 1985 gross rating value of £270 in Scotland is reduced to £100

(c) Following the introduction of Council Tax, new properties will not appear on the rating lists. Estimated gross annual values are used for new properties as the basis of the Income Tax charge. In Scotland where the estimate is of a 1985 gross rating value that figure is divided by 2.7 in accordance with the concession outlined above.

(d) If the accommodation is provided for less than a year, then the annual value is proportionally reduced. The same principle applies to any rent payable by the provider or to any amount attributed in respect of a lease premium.

Section 106

(e) See paragraph 21.13 onwards for advice on calculating the cash equivalent of the benefit where the living accommodation costs over £75,000.

21.10

The employee is also liable to tax for any occupier’s liabilities borne by the employer.

Calculation of cash equivalent: accommodation costs £75,000 or less: lease premiums

21.11

Section 105A

(a) Where a lease premium is payable and the property is subject to a lease for a term of 10 years or less which was entered into or extended on or after 22 April 2009, in addition to any rent payable, an amount is to be attributed in respect of the lease premium

(b) But an attribution is not required if the property consists of premises or a part of premises that are mainly used for purposes other than the provision of living accommodation. For example, where the premises are mainly used as a shop and the living accommodation consists of a flat above the shop

(c) If an attribution is required, the lease premium is treated as rent paid and spread over the duration of the lease. The amount to be attributed in respect of a lease premium is given by the formula (A ÷ B) x C where:

  • A is the taxable period (in days). This will generally be the period in the tax year for which the accommodation is provided
  • B is the term of the lease (in days)
  • C is the total amount of lease premium that has been paid or will be payable by the provider

An example of how the formula applies in a simple case is given on page 79.

Section 105B

(d) There are special rules for attributing the lease premium for leases with break clauses. For this purpose a break clause is a provision of a lease that gives a person a right to terminate the lease which can be exercised in such a way that the term of the original lease will be 10 years or less. The Employment Income Manual has guidance including a worked example on the application of these rules.

21.12

Example

On 1 October 2012, an employer enters into a lease of living accommodation with a gross rating value of £1,000 that it provides rent-free to an employee from that date.

The lease is for a term of 5 years and does not contain a break clause. Under the lease, the employer pays rent of £120 per calendar year and a premium of £70,000 payable in 2 instalments, £30,000 on 1 October 2012 and £40,000 on 1 October 2013.

For 2012–13:

A is 187 days (1 October 2012 to 5 April 2013) B is 1,826 days C is £70,000

The amount of lease premium to be attributed will be (A ÷ B) x C = £7,168.

The total of the rent payable for the taxable period (£60) and the amount of lease premium attributed (£7,168) less any rent paid by the employee (nil) is greater than the gross rating value so the cash equivalent of the benefit will be £7,228.

Calculation of cash equivalent: accommodation costs over £75,000

21.13

Section 106

Where the cost of the property is over £75,000 (see paragraph 21.5) then the cash equivalent of the benefit is:

(a) The cash equivalent as calculated for property costing £75,000 or less (see paragraphs 21.9 and 21.11).

(b) Plus the excess of the cost (or deemed cost, see paragraphs 21.6 to 21.8) of the property, including the cost of any improvements over £75,000 multiplied by the ‘official rate’ of interest (see paragraph 17.4) in force at the beginning of the tax year. This figure is called the ‘additional yearly rent’.

(c) Minus any rent payable by the employee to the extent that it exceeds the annual value or the total of any rent payable and any amount attributed in respect of a lease premium (see paragraph 21.9(a)).

From the 2017 to 2018 tax year any amount paid as rent must be paid by 6 July following the tax year when the accommodation was provided in order for it to be classed as making good payment when calculating the cash equivalent.

If the accommodation is provided for less than a year, then the cash equivalent is proportionally reduced.

21.14

Example

By reason of his employment a senior executive is provided by his employer with a house which cost the employer £175,000 in June 1998. The gross rating value of the property is £1,000 and the executive is required to pay his employer a rental of £1,500 per annum.

Assuming that the executive occupied the property throughout the tax year and that the ‘official rate’ in force at 6 April (the beginning of the tax year) was 7.25%, the tax charges upon the employee for the year will be:

(a) Benefit under Section 105 (paragraph 21.9)
(No charge arises because the rental of £1,500 payable by the employee is more than the gross rating value of £1,000) NIL

(b) The additional yearly rent:

cost of providing accommodation £175,000
minus £75,000
excess is £100,000

£100,000 x 7.25% = £7,250

(c) Excess of rental payable over gross rating value:

rental payable by employee = £1,500
minus gross rating value of £1,000
unused excess rent = £500

Subtract unused excess rent from additional yearly rent (b).

The cash equivalent of the benefit is £6,750.

Annual value equal to open market rental value of the accommodation

21.15

ESC A91

In some circumstances the annual value (see paragraph 21.9(a)) may be the full open market rental value of the accommodation. In these circumstances the cash equivalent of the benefit will be calculated as if the property cost £75,000 or less, regardless of its actual cost.

Accommodation provided to more than one employee

21.16

Section 108

Where a property consisting of living accommodation is provided to 2 or more directors or employees in the same period, the cash equivalent of the living accommodation to each director or employee will be reduced.

Reductions will be made having regard to all the relevant facts so that the total cash equivalent for all the directors and employees concerned is not more than the cash equivalent had the property been provided as living accommodation to a single director or employee.

Provision of benefits or facilities connected with living accommodation

21.17

Section 201

The employee concerned is liable to tax on the expense incurred by the provider of the accommodation on benefits and facilities connected with the accommodation. Such expenses would include heating, lighting, garden maintenance, domestic or other services, and repairs and decorations except those within paragraph 21.20.

21.18

Section 205(2) and (3), Section 206(2), Section 206(3)

If the provider of the accommodation also equips the accommodation with furniture and this remains the provider’s property, the director or employee is taxable on the annual value of the use of this as described in chapter 6 paragraph 6.5 whilst, if furniture is given or transferred to a director or employee a taxable benefit will normally arise (see chapter 6 paragraph 6.9).

21.19

Section 315

The sums assessable upon a director or employee for benefits or facilities connected with the accommodation may be restricted if the individual concerned is entitled to the exemption described in paragraph 21.2. More information about this possible restriction of the tax charge relating to such ancillary services is given below.

21.20

Where a director or employee is entitled to the exemption described in paragraph 21.2 and expenditure is reimbursed to them, or is incurred for any of the following:

  • heating, lighting or cleaning the premises concerned
  • repairs to the premises, their maintenance or decoration
  • the provision in the premises of furniture, as is normal for domestic occupation, the sum assessable for this expenditure is not to exceed the limit specified in paragraphs 21.19 and 21.21.

21.21

The limit mentioned above is 10% of the net earnings of the employment and associated employments minus any contribution made by the employee to the expenditure set out in paragraph 21.20. For this purpose net earnings means the total remuneration as described in paragraph 1.21 (excluding the expenditure in paragraph 21.20 above) after deducting any capital allowances, pension contributions, retirement annuity payments and expenses allowable for tax purposes. If the accommodation is provided for less than a year the percentage of the net earnings referred to above is proportionately reduced.

21.22

Section 313

Expenditure on the following items in connection with living accommodation provided for a director or employee or for members of their family or household is not treated as giving rise to benefits assessable under the special rules:

  • structural alterations and additions to the premises, and
  • expenditure which would normally be the landlord’s responsibility, for example, repairs to the structure and the outside of the property (including drains and gutters, and so on) and repairs to installations in the property for the supply of water, gas and electricity and for sanitation (including sinks, baths and lavatories) and for heating

Deduction for business expenses

21.23

Section 364 and 336

Where the accommodation provided is simply a home for the employee and their family, the question of any deduction under the expenses rule described in chapter 7 does not arise. Where the employee must use part of the property exclusively for business, the expense of such use may be deducted in arriving at the tax charge.

For example, there may be circumstances in which part of the accommodation has to be reserved for business purposes, such as a showroom. In these cases, an appropriate deduction may be given for tax purposes.

21.24

If accommodation is provided for an employee, for example, in a flat or hotel, while the employee is on business duties away from their home and normal place of work, the cost of this may be allowable as a deduction under the expenses rule. For example, a company in Yorkshire may rent a London flat for an employee who has to make frequent business trips to London.

The extent of any deduction will depend upon the circumstances. If the accommodation is no more than an alternative to hotel accommodation and is not available for private occupation, the whole cost of renting and running the flat may be allowed as a deduction. On the other hand, if the employee or their family also had the use of the flat as a private residence any allowance would be restricted.

Provided living accommodation will never be included in a dispensation and so even if there’s a potential deduction under the expenses rules, the provision of the accommodation must be reported on form P11D each year.

21.25

If, however, a London flat is provided for an employee whose job is in London and the flat is used by the employee as a pied-à-terre, no allowance would be due. Equally, if the flat is used by the employee or the employee’s family as their only or second home, no deduction for tax purposes would be due.

Optional remuneration arrangements

21.26

Section 102(1B)

From 6 April 2017 where the living accommodation benefit is provided as part of optional remuneration arrangements the amount of the benefit treated as earnings from the employment is the greater value of the:

  • benefit worked out under the normal rules, and
  • amount of any salary or cash pay foregone

Where the benefit is given as part of optional remuneration arrangements the Income Tax exceptions do not apply.

There’s further guidance about optional remuneration arrangements in Appendix 12.

Updates to this page

Published 30 December 2019

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