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Home truths

Providing living accommodation for staff, particularly in areas with high property prices, is creating a headache for some schools. Anne Gregory-Jones reviews the issues facing those schools and assesses the potential liabilities

Traditionally, at least for schools with pupils that board, it has been necessary to have certain members of staff living in or near the school to provide proper care for the pupils and security for the building. Generally, HM Revenue & Customs (HMRC) has accepted that for certain designated members of staff – such as the head, matron, bursar, housemasters etc – no taxable benefit arises on the provision of living accommodation for these employees. This is usually referred to as “job-related accommodation”.

However, where a school provides living accommodation to its staff outside these circumstances, tax charges do arise and can be high. Income tax charges will also arise on associated costs such as utilities and furniture. As a result of the rising property prices, schools are finding it increasingly difficult to attract and retain staff. This article will look at some of the options available.

Traditional living accommodation
HMRC is taking a harder line in negotiations in all areas where benefits-in-kind are concerned and is seeking greater levels of justification to applications put to them. Under UK tax legislation, a benefit-in-kind arises on the value of living accommodation provided to employees, unless it is job-related. Whether a property provided to a member of staff can be treated in this way will depend on whether certain criteria are met.

The tests for job-related accommodation are as follows:

• is it customary? Is it recognised as the norm that this type of role is provided with accommodation and not just historically for this person in a particular role; and

• is it for better performance? The job must be seen to be performed better, not just more quickly. An example is where an employee is on-call outside their usual working hours and is called out frequently.

Both tests need to be met in order to ensure that no tax charge arises.

Valuing the benefit-in-kind
Although there are many ways that a property may become an asset of a school, the tax charge is based on either purchase price or rental value. Where the school is renting or leasing a property, the value of the benefit is that cost to the school.

The basis for calculating the benefit charge for owned property can be complex. Broadly, it is calculated on the cost to the employer.

For properties with a cost of up to £75,000, the benefit charge is based on the gross rateable value (GRV). This is as set by the General Rates Act for England and Wales 1973, a similar act will apply for Scotland. New properties do not have this established value, although HMRC’s valuation office should be able to provide a value.

For properties costing in excess of £75,000, the benefit charge is based on the GRV, plus the balance of the value of the property over £75,000 multiplied by the official rate of interest. For example, if a house was purchased for £150,000, the benefit charge is calculated as follows:

The cost of the house                           = £150,000

GRV on £75,000                                  = £2,500 pa

Balance (£150,000 minus £75,000)

£75,000 x 5%                                     = £3,750

Benefit value                                      = £6,250

The benefit value is the amount on which the employee’s tax charge and the employer’s NIC liability is based.

Associated liabilities
The costs of utility bills and furniture, where this is provided by or reimbursed by the employer, are also benefits-in-kind. For job-related accommodation, no benefits arise for council tax and water rates, but a charge will arise on the cost of heat and light etc.

Accommodation as an incentive
In the public sector, teachers are considered to be key workers and receive assistance with the renting or purchasing of property under the Key Worker Living Programme.

No similar scheme exists for independent schools so, as house prices are rising rapidly, some schools are considering ways to provide prospective or existing employees with a means to climb on to the property ladder. One of these is assistance with obtaining a property in the vicinity of the school. This usually involves some form of shared ownership.

Although there are many factors to consider when entering into these arrangements, this article has focussed on the tax aspects only. Each arrangement would need to be considered on its own merits to assess whether there was a tax charge and the value of that arrangement on which tax would be charged.

The fundamental employment tax question is: does the employee get something for nothing or for less than market value? If the answer is “yes”, then an income tax charge is likely to arise, which will also mean an NIC charge for the school. Two of these possible arrangements are considered below.

Shared ownership
Under this arrangement, the school buys the freehold of a property and then grants a shared ownership lease for a percentage, say 50 per cent, of the property. The balance of the property that is not covered by the lease would usually be subject to rent. If the potential tax charge is then calculated on the basis that no rent is paid and the employee pays the equivalent (benefit-in-kind value) amount back to the school, no tax or NIC charge should arise.

Please bear in mind that these figures are for illustrative purposes only:

100% lease                                                  = £200,000

Employee purchases 50% lease                     = £100,000

Cost of which charge is calculated                  = £100,000

First £75,000 = GRV                                      = £2,500

Excess of £75,000 (£100,000 minus £75,000)
= £25,000 @ 5%                                           = £1,250

Benefit value (amount paid by the employee)  = £3,750

GRV is usually low, set in terms of hundreds of pounds rather than thousands.

Joint owner
In this scenario, the school and the member of staff jointly purchase a property, possibly through a trust, as tenants in common. This gives equal rights and responsibilities on the property. It is important to ensure that the documentation is drawn up by your solicitors.

If the split of ownership is on a 50:50 gain, no tax charge should arise providing all the appropriate paperwork is in place.

Where the school owns a greater proportion of the property, it is likely that a tax and NIC liability will arise. This will be based on the proportion of the value of the property owned by the school, although there may also be other factors that affect the value.

Considerations
There are a number of factors which will need to be considered by the school before entering into any such arrangements including:

• the cost, not only of the property but also of the legal fees for setting out the contract between the school and the member of staff;

• the type of arrangement to be entered into, for example shared ownership lease or joint ownership, and there are likely to be others;

• whether to offer only one type of arrangement or more;

• who to provide this option to; and

• how risks would be kept as low as possible for the school.

To ensure that you fully understand the legal and financial implications of entering into any of these arrangements, advice should be obtained from your solicitors, tax and financial advisors.

It may also be advisable to seek HMRC approval from the outset to ensure that no unpleasant shocks arise in years to come. These types of arrangements will be a financial burden to the school and whether they are feasible will depend on each particular school’s arrangements. However, it appears that one way or another, schools will always have accommodation issues.

Anne Gregory-Jones is a tax partner at haysmacintyre. Anne can be contacted on agregory-jones@haysmacintyre.com or 020 7969 5520.

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