Living accommodation as a taxable benefit

A charge to tax (ITEPA 2003 Part 3 Chapter 5) arises when an employee is provided with living accommodation by his employer (or by another person) where the provision is by reason of the employment and the accommodation is provided:

• rent free, or
• at a rent less than that paid by the person providing it, or
• at a rent less than the amount chargeable under Section 103 ITEPA 2003.

There is no statutory definition of ‘living accommodation’ and so it is given its everyday meaning. Examples of what is clearly ‘living accommodation’ are houses, flats, houseboats, holiday villas and apartments.

By contrast it does not cover accommodation in a hotel room nor other forms of board and lodging. It covers non-residential accommodation such as workshops, garages or offices. These items are all accommodation other than living accommodation.

Exempt accommodation
Accommodation provided for the better performance of the employee’s duties or provided by the employer because there is a threat to the employee’s physical security is an exempt benefit (s.99 & s.100 ITEPA 2003). The exemption would also apply if it is ‘customary’ for employers to provide living accommodation for employees.

HMRC manual EIM 11351 accepts the following classes of employee as receiving exempt accommodation:

• police officers and Ministry of Defence police
• prison governors, officers and chaplains
• clergymen and ministers of religion unless engaged on purely administrative duties
• pre-registration house officers before 1 August 2008 (see EIM61012)
• members of HM Forces
• members of the Diplomatic Service
• managers of newsagent shops that have paper rounds, but not those that do not
• managers of public houses living on the premises
• managers of traditional off-licence shops, that is those with opening hours broadly equivalent to those of a public house, but not those only open from 9 until 5 or similar
• stable staff of racehorse trainers, certain key workers who live on the premises or close to the stables.

Additionally, exempt accommodation rules also apply in boarding schools where staff are provided with accommodation on or near the school premises. The qualifying personnel are:

• head teacher
• other teachers with pastoral or other irregular contractual responsibilities outside normal school hours (for example house masters)
• bursar
• matron, nurse and doctor

(Boarding schools include schools where some of the pupils are boarders.)

There are some classes of employees for whom HMRC accept that the customary test is met but for whom the better performance test has to be considered in each individual case. For a list of these classes of employees see EIM11352.

Calculation of benefit

The way the cash benefit of accommodation is calculated depends on whether the property is:

• rented by the employer
• owned by employer and it is worth less than £75,000
• owned by employer and it is worth more than £75,000
• owned by employer but has been provided to the employee more than six years after it has been first acquired.

Calculation of the cash equivalent where the property is rented by the employer from another landlord.

The cash equivalent of the benefit is the higher of either:

a) the rent paid by the employer to the landlord or
b) the annual value of the property
less
employee contributions (ie any amount paid by the employee to the employer) for the use of the property.

The ‘annual value’ of living accommodation is defined in the legislation as the ‘the rent which might reasonably be expected if:

a) the tenant undertook to pay all taxes, rates and charges usually paid by a tenant, and

b) the landlord undertook to bear the costs of the repairs and insurance and the other expenses (if any) necessary for maintaining the property in a state to command that rent.’

In other words, annual value is the rent which might reasonably be expected to be obtained on letting the property if the tenant paid all the usual household bills and the landlord met all repair and maintenance costs.

Example 1

A Ltd has rented a property for £8,000 p.a. On 1 January 2021 the employee occupied the property and paid a rent of £3,000 to the employer. The annual rental value is £10,000.

The cash benefit to the employee for the year 2023/24 is calculated as follows:

• consider which is the higher: the rent paid by the employer to the landlord (£8,000) or the annual rental value (£10,000). In this case the rental value is higher
• deduct the amount paid by the employee to the employer ie £3,000
• value of the cash benefit is £7,000

Note that the employee is required to make the payment by 6 July following the tax year in question in order for it to be classed as ‘employee’s contribution’ when calculating the taxable value.

Calculation of the cash equivalent where the property is owned by the employer and the property cost the employer less than £75,000 (s.105 ITEPA 2003).

When calculating the cost of the property the cost of improvements carried out by the employer before the beginning of the tax year are taken into account. If the employee has contributed to the cost of those capital improvements, that contribution is deducted from the cost of property.

Improvements made during the year will affect the cost used in calculating the benefit in the following year.

If the property cost is less than £75,000 the cash benefit is the annual value of the property less employee contribution for the use of the property.

The annual value is determined as being the rent which might reasonably be expected to be obtained on letting the property if the tenant paid all the usual household bills and the landlord met all repair and maintenance costs.

Example 2

B Ltd has acquired a flat for 50,000 on 1 January 2022. On 1 February 2023 the employer paid £7,000 for a new roof, and on May 2023 the employer paid another £5,000 for a new conservatory. The employee was required to pay the employer £500 rent. The annual value of property is £1,000.

The cash benefit to the employee for the year 2023/24 is calculated as follows:

Calculation of the cash equivalent where the property is owned by the employer and the house cost the employer more than £75,000. (s.106 ITEPA 2003)

If the cost of the property (calculated as above) is more than £75,000, there will be an additional benefit called the ‘additional yearly rent’.

Additional yearly rent is given by the formula ORI x (C–£75,000) where

• ORI is the official rate of interest on 6 April in the tax year
• C is the cost of providing the accommodation (that includes the purchase price, plus improvements made before the beginning of the tax year less employee capital contributions)

There is a special rule applied when living accommodation was provided to the employee more than six years after the property had been first acquired.

S107 ITEPA 2003 provides that the cost of the property is calculated using the formula:

Example 4

D Ltd has acquired a flat for £200,000 on 1 January 2000. The property annual value is £10,000. In 2020 the employer has provided the property to an employee, and the employee was required to pay £6,000 for use of the house. The property’s market value in 2020 was £300,000.

The cash benefit to the employee for the year 2023/24 is calculated as follows:

If property prices falls and the market value is less than original cost, the market value of the property will still be used to calculate the benefit.

If the original cost of the property is less than £75,000, there will be no additional yearly rent, regardless of the current market value.

Same accommodation provided for more than one employee
Where living accommodation is provided to more than one employee in the same period, the total amount of the cash equivalent of the benefit is limited to the cash equivalent that would have arisen if the property had been provided to a single person. The cash equivalent for each employee is apportioned on a just and reasonable basis (S.108 ITEPA 2003).