The huge increase in house prices in recent years has led some employers to provide free accomodation for directors and employees.

But employers should remember that there is a special tax charge when they provide living accomodation for a director, employee, or a member of their household. Some accomodation is exempt from tax, where, for example:

• An employer provides housing or lodgings for the better or proper performance of the employee's duties.
• Accomodation is supplied in accordance with customary practice.

The exemptions for proper performance and for customary practice do not apply to directors, unless the company is non-profit making or is set up for charitable purposes only.

Tax on living accomodation.

When accomodation costs £75,000 or less, the tax charge is based on the gross rateble value of the property, or the actual rent paid by the employer, less any amounts contributed by the employee.

When accomodation costs more than £75,000, there is an additional tax charge which is calculated as follows:

Lightyear Ltd buys a home for its director, Woody, who is a 40% taxpayer. The home costs £310,000 and the company spends a further £90,000 on improvements. The official rate of interest is 4.75%, the annual rateable value is £1,200. Woody contributes nothing toward the cost.

He is taxed on a benefit of:

Annual rateable value          £1,200

Additional benefit:

Cost and improvements       £400,000

Less:                                    £75,000

                                            £325,000 x 4.75 = £15,437

Benefit                                 £16,637

Less: contribution

Taxable benefit                     £16,637

As a 40% taxpayer, the accomodation costs Woody £568 a month in tax and NICs.

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