Taxation of Living Accommodation - New tax exemption for holiday homes purchased through a company

Written by Ian Congreave - Filed under: Living Accommodation (D) on September 7th, 2008

Hi! If you're new here, you might want to register for free email updates. Just use the form at the top of the sidebar. Thanks for visiting The Payroll Blog!

People setting up a company to buy property abroad will no longer pay tax on the provision of living accommodation. Employers wishing to take advantage of the tax exemption must understand the qualifying conditions.

The Finance Act 2008 included a new tax exemption intended to help individuals who purchase property abroad in the name of a company rather than in their own name. There are a number of reasons for doing this, for example, because the country abroad does not permit non-residents to buy property, or for tax advantages, or to avoid inheritance issue. The individuals become directors of the “property company” they set up to hold title to the property.

The problem until now with that arrangement is that the Benefits Code in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) imposes a tax charge on the provision of living accommodation to directors and employees, and their families and households, when they make use of the accommodation or it is available for their use. No tax charge arises when it is let or available to let commercially. Such a tax charge was never the intention of the legislation; the tax rules are aimed at the provision of living accommodation as an employment benefit.

The exemption has retrospective effect, enabling individuals who have had to pay a tax charge in the past to claim a tax refund. HMRC has provided a method of claiming exemption on its website.

The legislation is of interest, however, to employers, as there is potential for the new exemption to be used as a tax avoidance arrangement. For example, in order to provide an employment benefit, an employer could provide financial assistance for one or more employees or directors to set up a company and buy property abroad, for use as holiday homes.

The conditions that must be met for the exemption to apply are explained below. Although the statutory rules, in sections 100A and 100B of ITEPA, are expressed from the point of view of the individual setting up the company to buy property, the following notes look at the rules from the point of view of an employer who is considering using the exemption as a way of providing living accommodation without a tax charge. The terms “employer” and “employee” are to be understood in this context, and the company that is set up to own the property is called “the property company”.

For the exemption to apply,

the property company must be wholly owned by the employee, or by the employee and other individuals (e.g. other employees or family members)
the property company holds an interest in the property
that interest is the property company’s main or only asset
if the property company has any other business activities, they are incidental to that interest in the property
since first acquiring that interest, the property company has held it continuously.

It would be possible, therefore, for an employer to provide financial support in some way in order to enable one or more employees or directors to set up a company and buy property abroad. However, the arrangement would have to be completely at “arm’s length” and, where appropriate, other Benefits Code charges could arise. To prevent tax avoidance, the exemption is lost in the following circumstances:

the employer sells the property, or arranges for it to be sold, to the property company at undervalue, i.e. at less than its market value
after the purchase, the employer incurs expenditure, directly or indirectly, in respect of the property, e.g. in maintaining or developing it
the employee borrows money from the employer for the purchase other than
- at commercial rates of interest, or
- at beneficial interest rates, and the employee pays the Benefits Code tax charge on the provision of a beneficial loan
any other tax or NICs avoidance arrangements are made in order to take advantage of the exemption.

So, the exemption from the living accommodation charge could be avoided legitimately if, for example, in order for the employee to buy the property,

the employer provides a loan at commercial rates, or provides a free or low-interest employment loan on which the employee pays tax as an employment benefit, and
the employer has no legal interest in the property and incurs no further ongoing expenditure, directly or indirectly, related to the property.

Given the complex nature of calculating the reportable value of living accommodation provided abroad, it may be easier, if not more tax effective, for an employee to pay the tax charge on a beneficial loan instead. The problem for the employer, however, is that the property abroad is owned entirely by the employee and the employer has no future claim over it.

This explanation is only a summary of the tax exemption rules and legal advice would be essential if an employer wished to take advantage of the exemption in order to provide an employment benefit.

Further information:
Finance Act 2008, sections 100A and 100B
Holiday homes abroad purchased through a company

The UK Payroll News is sponsored by HRD & Payroll Solutions

Written by Ian Congreave -

Filed under: Living Accommodation (D) on September 7th, 2008