On 30 July the First-tier Tribunal decided that Mr Justin Flanagan, who took out a loan as an employee of RBS, was correctly taxed on a benefit in kind because the rate of interest charged on the loan was less than the official rate of interest. This was the case even though the rate he paid was a market rate, indeed he could have got a lower rate if he had gone to another commercial lender.
Mr Flanagan argued that he should not suffer a benefit in kind charge because he had not truly received a benefit from his employment with the bank. However, the tribunal decided that although the benefits code gave an unfair result, the rules for computing a benefit in kind are clearly set out in the statute.
The benefit is to be calculated as the difference between the official rate of interest and the interest paid by the employee. The fact that the rate paid by the employee is a commercial rate of interest is not relevant if that rate is lower than the official rate. As a result, an income tax liability arises on the difference.
While the official rate of interest is set at a rate that is significantly higher than the rate of interest that can be obtained commercially for home loans, this situation will arise frequently. Employees of banks and other lenders who are able to secure favourable mortgage arrangements therefore need to factor into their calculations the tax costs arising from the mortgage. There may, however, be other reasons for taking up employee loans, for example, a higher loan to value may be available, or there may be lower redemption penalties.
It may be interesting to note that if the rate of interest charged on the loan is higher than the official rate there is no corresponding relief against income tax.