Living Accommodation Provided by an Employer: Understanding the Tax Implications

Providing living accommodation to an employee can be a valuable part of a remuneration package, particularly where the role requires the employee to be close to their place of work. However, from a tax perspective, employer-provided accommodation is treated as a benefit in kind and can give rise to a taxable charge on the employee.

Whether a tax charge arises, and how the benefit is calculated, depends largely on whether the accommodation is considered job related or non-job related, as well as whether the property is rented or owned by the employer. Understanding these distinctions is essential for employers to remain compliant and for employees to understand their tax position.

When Is Living Accommodation Taxable?

As a general rule, if an employer makes a house, flat, or other property available for an employee’s use, the employee is treated as receiving a taxable benefit. This applies whether the property is owned outright by the employer or rented from a third party.

The key exception is where the accommodation qualifies as job-related. In these circumstances, no taxable benefit arises on the provision of the accommodation itself.

Job-Related Accommodation

Accommodation is regarded as job-related where the employee is required to live in the property in order to perform their duties properly. This typically applies where it is essential, rather than merely convenient, for the employee to live on site.

Common examples include caretakers who must be available outside normal working hours, lockkeepers, or other roles where a continuous presence is required. In these cases, the employee can demonstrate that occupying the property is necessary for the proper performance of their duties.

Job-related accommodation can also apply where living on site allows the employee to perform their duties better and it is customary for employers in that industry to provide accommodation. For example, staff working at boarding schools are often provided with accommodation on the school premises, and public house managers frequently live above or adjacent to the premises they manage. In both cases, providing accommodation is a recognised and established practice within the sector.

Accommodation provided because of a genuine and specific threat to the employee’s personal security may also be treated as job related. This exemption is narrowly drawn and generally applies only in exceptional circumstances.

Where accommodation qualifies as job related, there is no taxable benefit on the provision of the property itself. However, as discussed later, separate rules apply to household expenses paid by the employer.

Non-Job-Related Accommodation

If accommodation does not meet the criteria for job-related status, a taxable benefit will arise. The method used to calculate the benefit depends on whether the employer rents the property or owns it.

Where the employer rents the property from a third party and makes it available to an employee, the taxable benefit is based on the higher of:

• The rent paid by the employer for the property, and

• The annual value of the property.

  
  

The annual value broadly represents the rent that could reasonably be obtained if the property were let on the open market, assuming the tenant paid normal household bills and the landlord covered repairs and maintenance.

If the accommodation is only available to the employee for part of the tax year, the benefit is reduced proportionately.

Any contributions made by the employee towards the cost of the accommodation, such as rent paid to the employer, are deducted when calculating the final taxable benefit. However, employee contributions cannot create a negative benefit; the minimum taxable amount is nil.

In practice, employers sometimes pay an upfront lease premium instead of higher annual rent, particularly where the lease is relatively short. To prevent this arrangement from reducing the taxable benefit artificially, any lease premium paid for a lease of ten years or less is effectively spread over the term of the lease and treated as additional rent when calculating the annual benefit.

Where the employer owns the property, the starting point for the benefit calculation is again the annual value.

If the cost of the property to the employer does not exceed £75,000, the taxable benefit is simply the annual value, reduced by any employee contributions.

If the cost exceeds £75,000, an additional charge arises. This is commonly referred to as the additional yearly rent. It is designed to reflect the benefit of the employer having capital tied up in providing accommodation.

The additional charge is calculated by taking the excess of the property’s cost over £75,000 and applying the official rate of interest in force at the start of the tax year. This amount is added to the annual value to arrive at the total taxable benefit.

As with rented accommodation, any contributions made by the employee are deducted when calculating the final taxable amount.

A special rule applies where an employer purchases a property but does not make it available to an employee until more than six years after it was acquired.

In this situation, the additional charge is not based on the original cost of the property. Instead, the calculation is based on the market value of the property at the time it is first made available to the employee. This prevents employers from avoiding higher benefit charges by holding on to valuable properties for long periods before providing them to employees.

This rule only applies where there is a gap of more than six years between acquisition and first occupation by the employee.

Household Expenses

In addition to the accommodation itself, employers sometimes pay household expenses on behalf of employees, such as gas, electricity, water, council tax, cleaning, or gardening costs.

Where these expenses are paid by the employer, they generally give rise to a separate taxable benefit equal to the cost incurred by the employer. This applies whether the accommodation is job related or not, although there are limited relaxations where employees live in job-related accommodation.

It is important to note that costs relating to the structure of the property, such as major repairs or alterations, do not create a taxable benefit. These are regarded as the employer’s responsibility as property owner.

Getting the Position Right

Employer-provided living accommodation is an area that often causes confusion, particularly where roles evolve over time or where directors and shareholders are involved. Incorrect treatment can lead to unexpected tax liabilities for employees and reporting issues for employers.

If you have provided accommodation to an employee, or are considering doing so, it is important to review whether or not the accommodation qualifies as job related and ensure that any taxable benefits are calculated and reported correctly.

Speak to an Expert

Providing living accommodation can be an effective way to attract and retain staff, but it comes with complex tax implications. If you would like a detailed review of your arrangements, including reporting requirements and potential tax exposure, please contact us. Our team would be happy to assist.

Authored by: London Team