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HMRC internal manual

Employment Income Manual

Optional remuneration arrangements: living accommodation

Chapter 5 of Part 3 ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. Where the benefit is living accommodation, the transitional rules apply up to 5 April 2021. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

Where an optional remuneration agreement is used to provide the employee with living accommodation, the relevant amount to treat as earnings from the employment is the greater of:

  • the modified cash equivalent of the benefit, or
  • the amount foregone in relation to the provision of the benefit.

The ‘modified cash equivalent’ in relation to the provision of living accommodation means it is worked out in the same way as the cash equivalent of the benefit is calculated by applying the normal benefit in kind rules, but without taking into account any rent paid or amount made good. Guidance on measuring the cash equivalent of the benefit of living accommodation starts at EIM11428:

When determining the taxable value of the benefit and whether to use the cost of providing the benefit or the amount foregone, any rent paid by the employee is not taken into account in determining the relevant amount. However, if any amount has been paid this should be deducted from the relevant amount.


An employer rents a property for an employee to occupy. The rent paid by the employer is £12,000 each year. The employee is required to pay a contribution of £3,000 per year towards that rental and on top of that sacrifices salary of £3,000. The modified cash equivalent is the rent paid by the employer of £12,000, without taking into account anything paid by the employee. The amount foregone in relation to the provision of the living accommodation is £3,000. The modified cash equivalent of £12,000 is used as the relevant amount as it’s the greater figure. The rent paid by the employee is then deducted from the relevant amount.

Where it’s necessary to apportion the benefit charge on the provision of living accommodation under an optional remuneration arrangement, the apportionment should be made on a just and reasonable basis. 

The exemptions under section 98 ITEPA (accommodation provided by local authority) and section 99 (accommodation provided for performance of duties) do not apply where the living accommodation is provided as part of optional remuneration arrangements.