Irwin Mitchell | Focus on Education | Tax considerations for educational establishments providing living accommodation: Part 2

Tax considerations for educational establishments providing living accommodation

Part 2

In our previous edition of Focus on Education (Spring 2016) we looked at the provision of living accommodation and the available exemptions from a tax charge where the employee satisfies the “job related” rules. Part 1 explained how HMRC calculates the benefits where the provision of living accommodation does not meet the exemptions. There are a number of benefits that can be associated with the provision of living accommodation that need to be considered separately.

1 Living accommodation

The benefit in kind charge on the provision of living accommodation is dependent on the cost of the property to the employer. There are two ways in which the benefit can be calculated and which one is used depends on whether the accommodation cost greater than £75,000 or less.

The cost of the living accommodation for this purpose is calculated on the following basis:

  • The amount spent by the person/ organisation providing the property in acquiring it, plus
  • The amount spent by that person/ organisation on improving it prior to the relevant tax year, less
  • Any amount paid by the employee to reimburse any of the above costs or for the grant of a tenancy agreement.

It is necessary for the employer to review the situation each year to determine if any improvements have taken the property cost to above £75,000. Repairs and decorating would not normally be regarded as improvements. Once the cost of the property has been determined it will be necessary to calculate the taxable benefit on the following basis.

Cost less than £75,000

Where the cost of the property is less than £75,000 the benefit is the greater of:

The annual value of the property, or the rent paid less any rent paid by the employee. In the vast majority of cases where the employer does not own the property the benefit will be equivalent to the rent paid by the employer. However the “annual value” of the property will generally be used if the property is owned, because for property situated in the UK the annual value is based on the rental values that were established back in the 1970’s. For newer properties it is necessary to estimate the rateable value as if the property existed back in the 1970’s. These amounts are significantly lower than the current rental value.

Cost greater than £75,000

Where the property cost greater than £75,000 the benefit is calculated on the same basis as those under £75,000 however an additional charge is levied on costs over £75,000. This additional charge is calculated by applying the official rate of interest at the beginning of the tax year (currently 3%) to the excess over £75,000.


If a property cost £200,000 and had a rental value of £500 (based on the 1970 figures) the living accommodation benefit would be:

Step 1 - calculate the original benefit as if the property was less than £75,000.
This would be £500.

Step 2 – calculate the additional charge (£200,000 less £75,000 = £125,000 x 3%).
This would be £3750.
The benefit would therefore be £4250.

Please note – the calculation is based on “cost” and not market value. So if an employer bought a property in the 1950’s for say £60,000 this may have a current market value today of say, £500,000. This increase in value would not affect the benefit calculation provided the “cost” to the employer at the beginning of the tax year was less than £75,000.

However, there are special rules that can apply if the property cost more than £75,000 that result in the properties market value being used to calculate step 2 above. These rules apply if, at the date the employee first occupied the property, the employer had an interest in the property throughout the previous six years.

For example if an employer bought a property for Glenn to occupy at a cost of £200,000 in July 1999 the benefit calculation for the him at step 2 will be based on £125,000. However, if Glenn left employment in 2015 and the company then provided the property to Paul, when the current market value is £500,000, the benefit calculation at step 2 for Paul will be based on £425,000. This is because when the property was first provided to Paul it cost the employer more than £75,000 and the employer had owned it for at least the previous six years.

2 Furniture

The most common scenario that arises is where an employer provides furniture because the property is let furnished from a landlord. The provision of the furniture is therefore within the rent paid and no additional benefit applies.

If an employer furnishes the property, it is necessary to work out the value to the employee of being allowed to use this which will depend upon whether the employer retains ownership of the furniture or if it belongs to the employee. If the employee simply buys new furniture and the employer reimburses the cost on the understanding that the furniture belongs to the employee then a benefit in kind will arise on the amount paid by the employer.

Where the employer retains ownership and allows the employee to use it a benefit in kind arises on the market value at the time it was first provided to an employee. The benefit is 20% of this value per annum. So if the employer provided furniture with a value of £5000 the taxable benefit would be £1000 per annum. This applies, even if the employee is provided with the furniture for more than five years. It may therefore be worthwhile reviewing any furniture provided to an employee for a number of years to ascertain if it would be cheaper to actually gift the furniture to the employee. Where furniture has been provided to an employee an additional tax charge can arise if the furniture is then sold/gifted to either the same employee or another employee.


If a desk was purchased at a cost of £1,000 and used by employee 1 at their home for two years and then sold to employee 2 for £50 the benefit position would be:

Employee 1 – the benefit would be two years at a value of £200 (£1000 x 20%)

Employee 2 – the benefit would be the original cost, less the amount paid and less the value of benefits already charged to employees.

That would be £550 (£1000 less £50 and £400). This would apply even if £50 was the true market value at the time of the purchase.

3 Payment of household costs

Where the employer pays for household costs, such as utilities, they are taxed as additional benefits in kind based on the cost to the employer, unless they can be specifically identified as business costs. Where an employee is provided with job-related living accommodation that does not attract a benefit on the provision of living accommodation this exemption also extends to the employer paying the employees Council tax and water rates. If the employee is required to work at home under a homeworking arrangement then the employer may be able to pay for additional household costs that arise whilst working at home. HMRC will allow an employer to reimburse up to £4 per week (£18 per month) without requiring supporting documentation of the additional cost.