A benefit in kind tax charge applies other than in very limited circumstances where an employer provides an employee with living accommodation. The charge applies regardless of how much the employee earns. It also applies even if the employee doesn’t actually use the living accommodation –the fact that the employer has provided it and it is available for the employee’s use is sufficient to trigger the tax charge.
The amount on which the employee is taxed is the cash equivalent of the benefit of the living accommodation. Specific rules apply to work this out. Where the cost is at least £75,000 an additional charge also applies.
The starting point is to work out the basic charge. This is found by taking the greater of the annual value of the accommodation and any rent paid by the employer for the accommodation, less any amount paid by the employee in rent.
The ‘annual value’ for a property is the rent which it might reasonably be expected to fetch if the tenant met the costs usually associated with a tenant and the landlord undertook to cost of repairs, insurance and other expenses usually met by the landlord. For properties in England and Wales, the annual value is based on the 1973 gross rating value. If there is no rateable value set, the District Valuer can confirm or provide a figure. This will apply to newer properties.
However, if the employer rents the property and the rent paid by the employer is higher than the rateable value, the rent paid is used instead in working out the taxable benefit.
An employer provides living accommodation for an employee throughout 2010/11. The employer rents the flat at a cost of £575 per month. The flat has a gross rateable value of £2,000. The employee does not pay any rent.
The basic charge is found as follows:
Rent paid by employer (£575 x 12)
Less: rent paid by employee
The cash equivalent of the basic charge is £6,900.
An additional charge applies if the living accommodation that is provided to the employee costs more than £75,000. The cost is generally the amount paid for the accommodation, plus any amount spent on improving it prior to making it available to the employee. If the employee makes a contribution to the cost, this is deducted as is any amount paid by the employee for the grant of the tenancy.
In a case where the employer has held an interest in a property for six years prior to it being occupied by the employee and the property was first occupied after 30 March 1983, the market value at the date that the employee took up residence is used instead of the cost. This is adjusted to reflect the cost of subsequent improvements and any contributions made by the employee.
The additional charge is found by multiplying the ‘official rate of interest’ for the period by the excess of the cost over £75,000 and deducting any rent paid by the employee which was not deducted in calculating the basic charge (excess rent).
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