Renting through your employer is becoming quite a popular route to renting in London. Such arrangements are particularly popular amongst foreign skilled employees and are offered as an incentive by the employers to attract international talent.
From the employee perspective, this article covers the type of legal agreement between the employer and the employee, right to rent checks, rent payments and whether a family could also live in the accommodation with the employee.
From the employer perspective, this article focuses on company lets, necessary payments and also covers when accommodation for employees becomes a taxable benefit in kind.
What are the practicalities of renting from an employer?
To start with, let’s explore the legal status of an accommodation provided by an employer. It is called ‘tied accommodation’, which is an agreement granting the right of occupation of an accommodation provided by an employer to an employee in connection with a contract of employment, where "employer" and "employee" are given the same meaning as in s.230 of the Employment Rights Act 1996, the act governing the employee’s contract of employment.
Tied accommodation agreements include service occupancy agreements and service tenancies, which depend on the type of job the employee undertakes as well as specific arrangements with the employer regarding the accommodation.
What does it mean to rent from an employer?
Repit identified two most common arrangements in this type of situations:
- When an employee rents directly from a landlord/agent, and the employer pays their monthly rent;
- When an employer rents from a landlord/agent, and allows the employee to occupy the property for the duration of their employment (with specific terms regulating this arrangement included in the employment contract).
In the first type, the tenancy agreement is usually between the landlord and the employee and looks like a typical tenancy agreement. The specific arrangements relating to the rent and bills payments are covered by the employment contract, to which the landlord is not a party. In this case, if the employment ends, the employee will remain in the rental should they wish so, but they must start paying the rent and bills themselves. The tenancy agreement regulating the property occupation will remain in place, but the contract of employment will not.
In terms of referencing checks, the usual bank statements, proof of identity, address history can be requested in relation to the tenant-employee by the landlord or agent.
In the second scenario, the employer acts in a landlord capacity and rent is either not payable, or deducted directly from employee’s wages. The employee has no contract with the agency that rented the property to the employer.
If the job is closely connected with the place of living and it would be impossible for the employee to do the job should they move out, if the contract of employment gets terminated, so does the tenancy. The tenancy gets terminated at the same time as the contract of employment. If that happens, the employee must find a place to live elsewhere as there is no specific tenancy agreement in place and the property is restricted to the employment by the company. This is called ‘service occupancy’ because the tenancy is directly linked to the services provided by the employee.
If the living arrangements are more of a ‘perk’ of the job rather than a requirement, i.e. by offering the rental, the employer is trying to encourage the employee to a) move to the same location as the office (if applicable) and b) through that, be more competitive than similar companies, that means a service tenancy may arise. It is where an employee lives in accommodation provided by their employer, but their occupation is not so closely connected with their employment as to create a service occupancy.
The term "service tenancy" is misleading, as there is no difference between an ordinary tenancy and a service tenancy, aside from the fact that the employer is the landlord and the employee is the tenant.
The tenancy will not end automatically when the employment terminates, so the employer would need to follow the appropriate procedure to gain possession depending on the type of tenancy (for example, an assured shorthold tenancy or a secured tenancy).
What about the right to rent checks?
Private landlords of residential properties in England are required to check the immigration status of prospective occupiers to check that they have the "right to rent".
Repit offers an insight to the right to rent checks which you can access here.
The Immigration Act 2014 excludes "tied accommodation" from this requirement.
The rationale for excluding tied accommodation from the right to rent checks is to avoid duplication with the right to work checks that employers are required to undertake when granting employment.
What about family members?
If other people occupy the property together with the employee, i.e. a family, a prudent approach would be to carry out the right to rent checks on the other occupiers. It may also be helpful to keep a record of the employee's immigration status with the service occupancy agreement, for example, in case the property is sold and the buyer requests information on the employee's right to rent.
Who should pay the bills?
When providing accommodation to employees, an employer pays certain tax, National Insurance and reporting obligations.
As well as the costs of the accommodation itself, this includes:
- Council Tax
- water and sewerage charges
- heating, lighting and cleaning
- repair, maintenance and decoration
- furniture for daily use
- staff for upkeep of accommodation, for example gardeners and cleaners
What’s the process of renting as a company?
If you are an employer and want to offer accommodation to your employees as part of their employment contract with you, you can do so in the UK.
The process is fairly simple as is governed by an agreement between the landlord/agent and the company.
As you are probably aware, the majority of rentals in the UK would be assured shorthold tenancies (ASTs). However, according to s.1 of the Housing Act 1988, only an individual (i.e. a natural person) can enter an assured shorthold tenancy — and companies do not fall under that definition.
So what law governs “company lets” and how does it differ from ASTs?
Firstly, unlike ASTs, when it comes to company lets, landlords can charge an unregulated amount of administration fees to conduct the letting process.
Secondly, there is no statutory rent protection for the company. As a solution, it is recommended to implement a rent review clause in the tenancy agreement, which will govern the way the rent might increase. If the landlord wants to alter the term, they can propose an adherence provision that would have to be signed by the company as well as the landlord.
Thirdly, since company lets are not governed by the Housing Act 1988, the eviction process differs. The landlord has to serve a ‘Notice to Quit’ when the fixed term tenancy is about to end. If the landlord wants to reclaim possession of the property before the tenancy has ended, they can do so by claiming a breach of contract and starting a ‘forfeiture’ procedure.
What about referencing checks for company lets?
Company lets tend to be for a longer period of time, i.e. 10 years. It leaves the landlord with a certain degree of worry-free freedom as they basically have the mortgage covered for years.
However, there is a risk of the company going bankrupt or becoming insolvent.
As such, the company must go through a stringent referencing checks process to prove their solvency and flag up any previous winding-up checks. It is also common for the directors of the company to become guarantors so that when the company itself goes bust, the directors will be liable for any outstanding rent. The guarantors are also subject to bankruptcy searches, and soft credit checks.
Is renting accommodation to an employee a taxable benefit?
From the employer perspective, living accommodation provided to employees as part of their employment is deemed to be a taxable benefit in kind (BIK), unless the living accommodation falls within HMRC’s exemptions. The exemptions are:
- the Necessary Test – the employees can’t do their work properly without the accommodation (for example agricultural workers living on farms)
- the Customary Test – an employer is usually expected to provide accommodation for people doing that type of work (for example a manager living above a pub, or a vicar looking after a parish)
- the Security Test – the company needs to provide accommodation to protect an employee because the type of work they do means there’s a special threat to their security.
- the Close Relative Exemption – if an employer is an individual, for example a sole trader, providing accommodation for someone because they’re a close relative, even if they work in the employer’s business.
The calculation of the BIK is complex and time consuming and depends on several factors, including whether or not the property is owned or rented by the employer and whether it cost more than £75,000.
The employer must submit form P11D and pay Class 1A National Insurance on the value of the benefit to HMRC.
Do you need more help?
As you can see, there are a lot of things to be aware of when you get offered to rent through your employer!
If you need more help, get in touch with our experts at Repit and we will answer those questions for you!
If you want Repit to take care of your accommodation contract review or provide advice on any issues arising from renting in England, whatever they may be, get in touch!
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