Are you relocating employees to the UK? Here we try to make the subject of relocation taxation a little clearer for you to understand.
If your organisation is considering relocating an employee to the UK or is already contributing towards employee relocation costs, the organisation will incur certain tax, National Insurance and reporting obligations, so you need to be aware of which relocation costs incur tax and what needs to be reported to HMRC.
On top of that, if your relocation policy does not include "gross-up" on relocation expenses above the current tax-free threshold, the employee will be responsible for any tax liability. In such circumstances, your employee will want to know what that tax liability is and how it can be reduced or managed effectively. If you do gross up, the budget holder will want to know what their tax liability is going to be.
If you are not familiar with the concept of grossing up, it is essentially the business paying the employee's tax liability.
HMRC website contains a staggering amount of pages, so it can be tricky trying to find anything you need from there. Nil desperandum. All of the information you need to know about tax for relocation into the UK is here, courtesy of HMRC.
Qualifying Expenses
HMRC grants an £8,000 (including VAT) allowance that exempts some employee relocation expenses from reporting and paying tax and National Insurance.
These are called "qualifying" expenses (i.e. they qualify for the exemption) and include, among others:
The costs of acquiring or disposing of a residence (rented or owned property);
Moving and storage costs
Travel and subsistence
Temporary accommodation
However, note that these costs only qualify for the exemption when all of the following criteria are met:
A new employee is moving area to start a job with your organisation, or
An existing employee is changing their place of work within the organisation
The costs are paid before the end of the tax year after the one in which the move took place (see examples below)
The employee’s new home is reasonably* close to the workplace and their old home isn’t
If any of the above does not apply, the £8,000 exemption will not apply and all relocation costs are subject to tax and National Insurance.
For qualifying costs over £8,000, you may have to report and pay tax and National Insurance.
* There is no precise definition of what is or what isn't a reasonable distance. It is for your organisation to decide and you may find that what constitutes sensible a travelling distance may be covered by the organisation's Health & Safety Policy.
Examples
The UK tax year ends on 5th April.
The move date is usually taken as the date the employee starts work in their new role.
So if an employee starts their new role on 2nd April 2018, the relocation costs must be incurred by 5th April 2019.
If an employee starts their new role on 2nd May 2018, the relocation costs must be incurred by 5th April 2020.
Qualifying Cost Categories
Those expenses and benefits which qualify for tax exemption are grouped into 6 categories by HMRC:
Disposal or intended disposal of old residence (rented or owned property)
Acquisition or intended acquisition of new residence (rented or owned property)
Transporting belongings
Travelling and subsistence (food, drink and temporary accommodation)
Domestic goods for the new residence
Bridging loans
1. Disposal of Old Residence
Legal fees or services connected with the disposal
Fees or services connected with the redemption of a loan (e.g. mortgage) relating to the property (i.e. if the loan was raised to acquire the property or if it was secured on the property)
Penalties for redeeming a loan relating to the property – e.g. mortgage redemption penalties
Real estate agent’s or auctioneer’s fees or services
Advertising for the property
Any eligible expenses of a sale that falls through as long as the employee does still change his or her residence
Disconnection of electricity, gas, water or phone services
If the property is left empty awaiting disposal:
Any rent paid for the period when the property is vacant
Insurance paid for the vacant period
Maintenance of the property during the vacant period
Preserving the security of the property during the vacant period
2. Acquisition of New Residence
Legal expenses and services connected with the acquisition, e.g. real estate agent's or solicitor's fees
Fees and services connected with any loan raised to acquire the interest in the property or any loan secured on the property (e.g. mortgage)
Procurement or arrangement fees connected with such a loan
Mortgage indemnity premiums
Survey or inspection of the property – both structural surveys and valuations
Land Registry/Keepers of the Register of Scotland fees
Stamp Duty (NB Stamp Duty Land Tax (SDLT) is payable on increasing portions of the rent or property price above £125,000 in England and Wales or £145,000 in Scotland)
Connection of electricity, gas, water and telephone services
Eligible costs in relation to a proposed tenancy or intended purchase that falls through
3. Transport of Belongings
Packing and unpacking
Temporary storage, where there is not a direct move from the old to the new residence (NB storage is always taxable if the employee has no intention of moving the belongings to the new residence)
Taking down domestic fittings in the old residence if they are to be taken to the new residence and reattaching them on arrival there
Transportation costs incurred in moving domestic belongings from the old residence to the new residence
Any costs of insuring the domestic belongings in transit
4. Travelling and Subsistence
Employee
Travel and subsistence costs incurred in respect of preliminary visits to the new location
Travel and subsistence costs incurred in respect of travelling between the old home and the new work location (where the house move takes place before the job transfer)
Temporary living accommodation where the employee intends to move to permanent accommodation to complete the relocation
Travelling between the old home and the temporary living accommodation
Travelling between the new home and the temporary living accommodation (where the house move takes place before the job transfer)
Travelling from the old home to the new home when the move takes place
Employee’s Family or Household
Travel and subsistence for preliminary visits to the new location
Travelling from the old home to the new home when the move takes place
Where a child aged 18 or under (who ordinarily lives with the employee) stays behind at the old location or is sent ahead to the new location in order to ensure continuity of education, relief is available for the cost of subsistence in the area where the child stays and for the costs of travel between that area and the employee’s old or new home
5. Domestic Goods for the New Residence
The relief applies where domestic goods intended to replace items used at the old home which are not suitable for use in the new home are purchased or provided by the employer.
Relief under this heading is available where the employee, or the employee and one or more members of the employee’s family or household, or one or more members of the employee’s family or household disposes of an interest in the old home and acquires an interest in the new home.
6. Bridging Loans
Relief is available where bridging loan interest is reimbursed to the relocating employee or the employer "makes" a cheap or interest-free loan to the employee, as long as the employee or member of employee’s household abide by the following:
Disposes of an interest in the old home and acquires an interest in the new home
Has to take out a loan to bridge the gap between the date when the interest in the new property is acquired and the date when the sale proceeds of the old property are available
Uses the loan only to redeem loans relating to the old home or to acquire the new home. A loan relates to the old home if it was raised to acquire the property, or if it was secured on the property
The loan does not exceed the market value of the old home at the time the new home is acquired
Where the bridging loan is not provided or facilitated by the organisation, and all the conditions above are satisfied, the interest on the loan is an expense that qualifies for exemption. If either or both of the last two conditions are not met the eligible interest is restricted to the amount that would be payable if the loan met both conditions.
Where the organisation makes a loan to the employee or to a member of the employee’s family or household, and all conditions above are met, relief may be available if the total of all other qualifying expenses and benefits is less than £8,000.
Non-Qualifying Expenses
That's the qualifying expenses out of the way, but what about relocation expenses that don't fall into the above categories? Well, that's the easy bit.
If an expense is "non-qualifying" it does not fall into the above categories and is taxable regardless of the £8,000 limit.
Conclusion
International employee relocation involves many different services and situations resulting in potentially complex tax scenarios. You are strongly advised to take professional advice from a tax specialist when dealing with international relocation.
Contact us today to see how we can help simplify taxation matters arising from employee relocation expenses.
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