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The need for a valuation for the purpose of assessing Employment Income will usually arise in the following circumstances:
- when a property is transferred to or from an employee or director other than at market value. (See paragraphs 1.51-53).
- when an employee or director is provided with accommodation by their employer (see paragraphs 1.54-56).
A charge to Income Tax may arise when a property owned by an employer is transferred to an employee or director for a consideration less than its market value.
In such cases the Inspector will normally contend that the employee or director is liable for Income Tax on the difference between the consideration paid and the market value of the property.
A liability to tax may also arise when an employee or director transfers a property to their employer for a consideration which is greater than its market value.
The liability to tax will in most cases arise under s.62, The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). ITEPA 2003 replaced s.19 ICTA 1988 (Schedule E) from April 2003. Subsection 62(2)(b) explains that ‘earnings’ includes “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”. ‘Money’s worth’ is defined in s.62(3) as something that is “(a) of direct monetary value to the employee, or (b) capable of being converted into money or something of direct monetary value to the employee.” The ‘money’s worth’ basis of valuation to be adopted in cases where the property has been transferred to an employee or director should be the price at which the transferee could have sold the relevant interest in the property at the date on which it came into their possession, provided that the sale was subject to the retention by them of whatever rights of occupation they enjoyed against their employer immediately before the transfer. (Guidance on the interpretation of rights of occupation can be found in the Inheritance Tax Manual, Practice Note 3).
This basis, which is derived from case law, differs from the open market value as applied in other revenue cases in that the ‘money’s worth’ basis hypothesises a sale by the actual taxpayer rather than by a hypothetical vendor. In practice this will produce the same valuation as the normal basis except where the property has special value for the actual taxpayer. For purposes of s.62, ITEPA 2003 that special value must be disregarded, for example, where the taxpayer was previously a protected tenant normal investment value should be adopted rather than a "tenant purchaser" bid.
In exceptional cases HMRC may seek to assess the benefit received by the employee under s.203, ITEPA 2003 (or prior to April 2003 under s.154 ICTA 1988), where the cash equivalent of an employment related benefit is to be treated as earnings. In circumstances where the benefit consists in the transfer of an asset and the asset has been used or has depreciated since the person making the transfer acquired or produced it, the cost of the benefit is deemed to be the market value of the asset at the time of transfer. In such cases the normal revenue basis of ‘market value’ should be adopted but if any difficulties arise advice should be sought from CEO Technical Section.
If a property has been transferred by an employer for less than its market value the Inspector will also compute the capital gain on the disposal made by the employer using market value in accordance with s.17(1)(b) TCGA 1992. In the past, if there was a charge under the former Schedule E, the consideration actually paid was usually treated as the disposal proceeds for CGT. This practice was withdrawn for disposals taking place on or after 6 April 1995.
If in any case the differing bases of valuation for CGT and Income Tax should give rise to different figures this must be clearly pointed out to the Inspector.
Under sections.97-113, ITEPA 2003 (formerly in s.145 ICTA 1988) an employee may be liable to a charge on living accommodation provided for their use by their employer. S.105, ITEPA 2003 provides for a charge based on the 'annual value' of the accommodation (or, if greater, the rent paid by the employer) less any rent paid to the employer by the employee. 'Annual value' is defined in s.110, ITEPA 2003 (formerly s.837 ICTA 1988) as the "rent which might reasonably be expected to be obtained on a letting from year to year if the tenant undertook to pay all the usual tenant's rates and taxes, and if the landlord undertook to bear the costs of the repairs and insurance, and other expenses, if any, necessary for maintaining the subject of the valuation in a state to command that rent." However, in practice, HMRC adopt the Gross Value of the dwelling for rating purposes in the 1973 Valuation List as being the 'annual value'. An explanation of the use by HMRC of the Gross Value is given in their Employment Income Manual at EIM11432.
In addition to the charge under s.105, if the cost of providing the accommodation exceeds £75,000, there may be an additional charge under s.106, ITEPA 2003. This additional charge is based on a percentage of the amount by which the cost of providing the accommodation exceeded £75,000. The cost of providing the accommodation is defined as the sum of acquisition cost and expenditure on improvements. However, in certain circumstances (s.107, ITEPA 2003) the charge is based on a percentage of the market value of the property rather than the cost of providing the accommodation.
Inspectors may require advice on:
- The Gross Value that would have been attributed to the property had domestic rating and the 1973 Valuation List been continued. Such requests are only likely to arise where the provided accommodation comprises a dwelling that has been constructed, created, or substantially altered after 31 March 1990, when domestic rating was abolished.
- The market value of the property for the purposes of an additional charge under s.106, ITEPA 2003.
Market value for the purposes of the additional charge under s.106, ITEPA 2003 is defined in s.107(3) as " the price which the property might reasonably be expected to have fetched on a sale in the open market with vacant possession." In estimating market value no reduction is to be made for an option in respect of the property held by the employee, a person connected with the employee, or a person involved in providing the accommodation.
The interest to be valued in cases where a market value for s.106 is required is the interest held by the person supplying the accommodation for the employee, but it will also include other superior interests in the property held by a relevant person (for example the employer where they are not the employees immediate landlord) or other connected persons. Where there is more than one interest to be valued the interests should be regarded as merged.