Employer provided housing is tax free where it is job related: the employee must live there to do the job properly, the job is one where accommodation is customarily provided and living there helps the employee do it better, or there is a special threat to the employee’s security. Most directors cannot use the first two tests unless they hold no more than 5% of the company and either work full time for it or the company is non profit making or charitable.

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Where do the three exemptions come from?

The charge on living accommodation sits in Part 3 Chapter 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Section 99(1) and section 99(2) contain the two performance of duties exemptions and section 100 contains the security exemption. HMRC’s Employment Income Manual summarises them at EIM11331 and stresses that they only apply to living accommodation. Board and lodging is outside them altogether.

This page looks at how each test is applied to a particular job. For how the charge itself is calculated when no exemption applies, see our guide to living accommodation provided to employees.

When is living there necessary for the job?

Section 99(1) exempts accommodation where it is necessary for the proper performance of the employee’s duties that they live in it. EIM11341 calls this a strict test. The employee must show that living in that particular property, as opposed to any other, is essential. In Langley and Others v Appleby the judge said the employee “must live in that house and no other”. A requirement in the contract to live there is not enough, and nor is an argument that the employee could not afford to live elsewhere, which failed in Vertigan v Brady.

EIM11342 lists the jobs HMRC accepts as meeting the test: agricultural workers living on farms or agricultural estates, lock gate and level crossing gate keepers, and stewards and green keepers living on the premises. Resident caretakers and wardens of sheltered housing used to be accepted, but because many no longer have to be on call outside normal hours HMRC stopped accepting them automatically, for wardens from 2006 to 2007 and for caretakers from 2010 to 2011. A shop worker allowed to live above the shop to deter burglars does not qualify.

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When is accommodation customary and for better performance?

Section 99(2) has two limbs and both must be met. The first is the customary test. EIM11347 says a practice is customary if it is recognisable as the norm and failure to observe it is exceptional, judged across that kind of employment generally, not just with one employer. In Vertigan v Brady two thirds of nursery foremen lived in provided accommodation, but that was not conclusive because the court also looked at how long the practice had existed and whether employers generally accepted it. EIM11348 adds that HMRC regards a custom as absent where fewer than half of employees in that kind of job are given living accommodation, and that board and lodging does not count towards the proportion.

The second limb is better performance. EIM11349 makes it an objective test that is not met because the home is close to work, since duties normally start on arrival. HMRC looks at duties outside normal hours. EIM11350 says the test is met in practice where the employee is required to be on call outside normal hours, is in fact frequently called out, and the accommodation gives quick access to the workplace.

EIM11351 lists jobs accepted as meeting both limbs, including members of HM Forces and the Diplomatic Service, Ministry of Defence police, prison governors, officers and chaplains, ministers of religion other than those in purely administrative roles, managers of public houses living on the premises, managers of newsagents with paper rounds, managers of off licences with pub style hours, and boarding school staff with duties outside school hours, such as the head, house masters, bursar, matron, nurse and doctor. EIM11352 accepts the customary limb for veterinary surgeons assisting in practices and managers of camping and caravan sites, leaving better performance to be shown case by case.

What counts as a special threat to security?

Section 100 exempts accommodation where there is a special threat to the employee’s security, special security arrangements are in force, and the employee lives in the accommodation as part of them. EIM11362 says the conditions are very difficult to meet and gives the example of an employee under a genuine terrorist threat to life. The threat must be to the employee, not to property, so housing a manager on site to protect stock or premises does not qualify.

Can a director qualify?

Section 99(3) removes the section 99(1) and 99(2) exemptions where a company provides accommodation to one of its directors or a director of an associated company, unless for every company of which the person is a director:

  • they have no material interest in the company, and
  • they are a full time working director, or the company is non profit making or a charitable company.

A material interest under EIM20212 broadly means owning or controlling, alone or with associates, more than 5% of the ordinary share capital. A full time working director must devote substantially the whole of their time to the company in a managerial or technical capacity; EIM20202 uses three quarters of the company’s normal working hours as a rule of thumb. Section 99(4) defines non profit making as a company that does not trade and whose functions are not wholly or mainly holding investments or other property. Section 99(3) does not mention section 100, so a director facing a genuine security threat can still use that exemption. The practical result is that an owner director of a family company living in a company owned house will almost never be exempt. Our guide to close company rules explains the related ideas of control and associates.

Are bills and running costs also tax free?

Where one of the three exemptions applies, section 314 removes any tax on council tax or rates and water and sewerage charges, whether the employer pays them directly or reimburses the employee. Other running costs are not exempt, but section 315 caps the taxable amount for heating, lighting and cleaning, repairs, maintenance and decoration, and furniture and other items normal for domestic occupation. EIM21721 sets the cap at 10% of the employee’s net earnings from the employment, less any amount the employee contributes, and reduces it proportionately if the accommodation is provided for only part of the year. Net earnings exclude the costs in question and allow deductions such as pension contributions and capital allowances, and for a company employer they include earnings from associated companies (EIM21722 and EIM21723).

Illustration only. A farm manager in exempt accommodation has net earnings of £32,000 for a full year. The employer pays £4,500 for heating, lighting and furniture and £1,600 council tax. The council tax is exempt under section 314. The running costs are capped at 10% of £32,000, which is £3,200, so £3,200 is taxable rather than £4,500.

What else can catch employers out?

  • Salary sacrifice. Section 99 only disapplies the charge in section 102(1A), which covers accommodation provided otherwise than under optional remuneration arrangements. Where accommodation is provided in exchange for salary, section 102(1B) taxes the relevant amount and section 99 does not switch it off. See salary sacrifice schemes.
  • Relying on old representative occupier status. HMRC used an extra statutory concession for posts treated as representative occupiers at 5 April 1977. EIM11339 records that it was withdrawn from 6 April 2021, so those posts now need to meet one of the statutory tests.
  • Assuming a role qualifies because a similar role elsewhere does. The customary test looks at the type of employment generally, and the better performance test turns on actual call outs.
  • Claiming exemption for whole groups. EIM11353 tells officers to take special care with claims made by employers or trade unions for large groups of workers.
  • Forgetting the other side. An employee in job related accommodation may also get capital gains relief on a home they own elsewhere, covered in private residence relief for job related accommodation.

Keep a file note showing which test applies, the duties relied on and, for the better performance test, a record of out of hours call outs. That is the evidence HMRC will ask for, and without it the full benefit is reportable on form P11D with Class 1A National Insurance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.