ATXP6 UK
Syllabus A1. Income tax A1a. Income from employment

A1a. Living accomodation

Syllabus A1a)

Income from employment

Living accommodation benefit

If an employer provides an employee with a home to live in, without the home being necessary for the employee to do his or her job, the employee will have to pay income tax on a living accommodation benefit.

If the home is necessary for the employee to do his or her job, then this benefit will not arise.

When is a home necessary for an employee to do their job?

Examples of when a home is necessary for an employee to do their job properly include:

  1. A nanny needs to live in the same home that their child lives in to do their job. 

    Otherwise, they will not be able to do their job. In this case, providing accommodation will be considered to be work related and a benefit will not arise.

  2. Someone in an army needs to live at the army base, otherwise they will not be able to do their job.

  3. A hotel-worker being provided living accommodation at the hotel will help them perform their duties better.

  4. If there is a special threat to the employee’s security and he lives in the accommodation as part of special security arrangements, this will ensure that he is safe to do his job.

    For example, the Prime Minister or President.

How to calculate the living accommodation benefit?

  • If the employer owns the home, then the home’s annual value will be used.

  • If the employer is renting the home, then the amount of the benefit is the higher of the rent paid by the employer and the annual value.

  • The amount paid by the employee to the employer will be deducted to give the living accommodation benefit.

Illustration - If the employer is renting the home

Ashok, a sales manager, lives in a flat that his employer has given him to live in. 

The employer pays rent of £5,000 per annum for the flat, and Ashok pays the employer £1,000 per year to use the flat.

The annual value of the flat is £4,900.

  • What is the living accommodation benefit that Ashok will have to pay income tax on?

Solution:

£
Rent paid by employer (as this is higher than annual value) 5,000
Less: Rent paid by employee to employer  (1,000)
Living accommodation benefit 4,000

Illustration - If the employer owns the home

Vandana, a marketing manager, lives in a flat owned by her employer. 

The flat has an annual value of £4,000 and she pays the employer £500 per annum to use the flat.

  • What is the living accommodation benefit that she will have to pay income tax on?

Solution:

£
Annual value 4,000
Less: Rent paid by employee to employer  (500)
Living accommodation benefit 3,500

Additional benefit

There is an additional benefit that can arise if the employer owns the home and it cost the employer more than £75,000 when they purchased it.

How to calculate the money value of the additional benefit?

Did the employer buy the home more than 6 years before he gave it to the employee to use?

  1. No
    (Cost - £75,000) * Official rate of interest (2.5% for 18/19) = Additional benefit

    Note
    The Cost  will include the actual cost of the home plus any amount spent on extending/enhancing the home before the start of the current tax year

  2. Yes

    (Market value - £75,000) * Official rate of interest = Additional benefit

    Note:
    The market value of the home when it was first given to the employee to be used (the purchase price is not used here).

Illustration - LESS than 6 years

Vandana, a marketing manager, lives in a flat owned by her employer. 

She has occupied the flat for the last 5 years. 

The employer bought this flat 5 years ago and paid £85,000. 

4 years ago, he spent £10,000 to add a garage onto the flat. 

What additional benefit that will she have to pay income tax on?

Solution:

(Cost - £75,000) * Official rate of interest (2.5%) = Additional benefit

(£85,000 + £10,000) = £95,000  (cost plus enhancement expenditure)

(£95,000 - £75,000) *2.5% = £500

£500 is the additional benefit that Vandana will have to pay income tax on.

Illustration - MORE than 6 years

Vandana, a marketing manager, lives in a flat owned by her employer. 

She has occupied this flat for the last 7 years,  and moved in when the flat had a market value of £100,000.

The employer bought this flat 15 years ago and paid £85,000.

What additional benefit that will she have to pay income tax on?

Solution:

(Market value - £75,000) * Official rate of interest = Additional benefit

(£100,000 - £75,000) *2.5% = £625

£625 is the additional benefit that Vandana will have to pay income tax on.

Conclusion:

The normal benefit and the additional benefit are added together to give the total living accommodation benefit that the employee will pay income tax on.

  • For example, Vandana will either pay income tax on:

    £3,500 + £500 = £4,000 (Flat was not purchased more than 6 years ago)

    or

    £3,500 + £625 = £4,125 (Flat was purchased more than 6 years before the employer gave it to her to use)