In principle, the living accommodation charge subject to income tax as a benefit in kind applies in respect of overseas property as it does for property in the UK. However, it is important to note that there is an exception where property is held through a company for legal reasons connected with the country in which the property is owned.
There are many reasons why a property abroad might be bought through a company, including fear of foreign litigation, restrictions applying to non-residents, local taxes, inheritance rules about enforced successions to property, and so on.
Finance Act 2008 introduced legislation designed to ensure that individuals buying a home abroad through a company, typically for holiday use, will not face a benefit in kind charge in certain specified circumstances. The legislation has retrospective effect so that the rules are deemed always to have applied (FA 2008, s. 45).
Subject to certain anti-avoidance rules, covered below, the exemption disapplies the living accommodation provisions where all of the following conditions are met (ITEPA 2003, s. 100A):
- living accommodation outside the UK is provided by a company for a director or other officer of the company (referred to as ‘D’), or a member of D’s family or household;
- the company is wholly owned by D (alone or together with other individuals, but not as partnership property); and
- the company has been the ‘holding company of the property’ at all times since the ‘relevant time’ (generally the time the company first owned an interest in the property)
Anti-avoidance
No exemption is given if the living accommodation is provided in pursuance of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or NIC (ITEPA 2003, s. 100B(4)). The concept of ‘arrangement’ is defined to include ‘any scheme, agreement or understanding, whether or not enforceable’ (s. 100B(8)).
Not surprisingly, the exemption is hedged about by various anti-avoidance provisions. In particular, these will cause the exemption to fail if there is any tax avoidance motive, including especially the case where a property has been acquired at less than its true value from a connected party. More specifically, the exemption under ITEPA 2003, s. 100A will not be given if any of the following applies:
Interest in Property acquired from a connected company at an undervalue
An interest is said to be acquired at an undervalue if the total consideration for it (whenever provided, and including rent) is less than that which might reasonably have been expected to be obtained on a disposal of the interest on the open market (ITEPA 2003, s. 100B(6)).
Post-acquisition expenditure by, or borrowing from, a connected company
The exemption is denied if, after the relevant time, expenditure in respect of the property has been incurred directly or indirectly by a connected company (ITEPA 2003, s. 100B(3)).
It is also denied if, after the relevant time, any borrowing of the company from a connected company (whether directly or indirectly) is outstanding. However, no account is taken for these purposes of any borrowing that is made at a commercial rate or of any borrowing that results in D being treated under the employment-related loans rules as receiving earnings.
A connected company means (ITEPA 2003, s. 100B(9)):
(1)a company connected with D, with a member of D’s family or with an employer of D; or
(2)a company connected with such a company.
Property acquired under arrangement involving avoidance of tax or NIC
The exemption is also denied if the living accommodation is providing under an arrangement the main purpose of which, or one of the main purposes, is the avoidance of tax or NIC (ITEPA 2003, s100B(4))
HMRC’s guidance is in their Employment Income Manual at pages EIM11371 to EIM11374.
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