Staff Mortgage Benefit In Kind

[Caveat Mortgagor]

I was browsing MSE boards and saw a tough luck story. I am not asking you to judge her, but I am asking if this is genuine?

The suggestion is that HMRC are effectively over-valuing the benefit of her staff mortgage because they have 4.75% as the benchmark, anything below that is a benefit and as interest rates have fallen, the hmrc rate hasnt changed their benchmark rate and sucked her into a situation where she owes the taxman money.

Does this sound genuine.If so, what impact do we think this may have?

http://forums.moneysavingexpert.com/showthread.php?t=3045332

[Berk-hater]

I was browsing MSE boards and saw a tough luck story. I am not asking you to judge her, but I am asking if this is genuine?

The suggestion is that HMRC are effectively over-valuing the benefit of her staff mortgage because they have 4.75% as the benchmark, anything below that is a benefit and as interest rates have fallen, the hmrc rate hasnt changed their benchmark rate and sucked her into a situation where she owes the taxman money.

Does this sound genuine.If so, what impact do we think this may have?

http://forums.moneysavingexpert.com/showthread.php?t=3045332

Well, if her employer had given a higher salary instead of a subsidised mortgage she would have paid tax on that. What's the difference, other than she presumably hasn't been saving any of the benefit?

[Caveat Mortgagor]

Well, if her employer had given a higher salary instead of a subsidised mortgage she would have paid tax on that. What's the difference, other than she presumably hasn't been saving any of the benefit?

I was angling at whether or not HMRC have 4.75 as their base rate figure and whether they have sucked thousands of people into a debt trap by not reducing in line with Merv the vigilant.

Edited February 11, 2011 by Caveat Mortgagor

[Berk-hater]

I was angling at whether or not HMRC have 4.75 as their base rate figure and whether they have hooked up thousands of people with debts to the taxman by not reducing it in line with vigilant Merv.

Fine, but then they should tax all those people on tracker mortgages for the same reason! If HMRC can claim real base rates are 4.75% then the BoE is offically subsidising tracker mortgages all over the country. Why don't HMRC go after them as well?

[interestrateripoff]

Fine, but then they should tax all those people on tracker mortgages for the same reason! If HMRC can claim real base rates are 4.75% then the BoE is offically subsidising tracker mortgages all over the country. Why don't HMRC go after them as well?

Surely by that logic everyone on over 4.75% should be in line for a tax rebate?

[Berk-hater]

Surely by that logic everyone on over 4.75% should be in line for a tax rebate?

Exactly! HMRC can't have it both ways.

[Berk-hater]

These are the "official rates" from HMRC.

http://www.hmrc.gov.uk/rates/interest-beneficial.htm

Just because her mortgage at 0.18% above base rate is technically "subsidised" why should she have to pay the difference when someone who has managed to secure a tracker mortgage at the same rate on the open market doesn't? It's absurd, and if it was me I'd challenge it to the very top.

[Berk-hater]

I've just re-read the person's post:

She used to have a mortgage at 0.18% above base rate, on which presumably she wouldn't have paid benefit in kind taxes, but was persuaded by the banking advisers at the bank she works for that she should change to the staff mortgage at base rate, on which she'd be taxed as a benefit in kind. Does she not have a case against her employer for mis-selling if they didn't point this out to her at the time?!

[Gigantic Purple Slug]

I was browsing MSE boards and saw a tough luck story. I am not asking you to judge her, but I am asking if this is genuine?

The suggestion is that HMRC are effectively over-valuing the benefit of her staff mortgage because they have 4.75% as the benchmark, anything below that is a benefit and as interest rates have fallen, the hmrc rate hasnt changed their benchmark rate and sucked her into a situation where she owes the taxman money.

Does this sound genuine.If so, what impact do we think this may have?

http://forums.moneysavingexpert.com/showthread.php?t=3045332

HMRC have standard rates for all sorts of stuff. Car mileage allowance etc. IMPO it's hard to claim you were "sucked into" a bad deal. At the end of the day you know the rate hmrc charges and its up to you to decide whether this is preferable or not to another deal you might get. Sounds to me like they thought, great I'll get a cheap mortgage off the company without looking into the details well enough ...

If you're an empolyee of a company I guess a well run company would make its employee aware of the situation in advance if they were offering loans at value below the standard HMRC rate and that tax on the difference would be payable. I guess this could only go on for one year max, as it would appear as a benefit in kind on a P11d. Unless of course the company didn't realise it and then I suppose you could end up liable for several years worth of payments when the error was finally found out and declared. In that case I am sure the Revenue would not demand payment at once but would allow reasonable installments.

I'd be interested in knowing what happens if the company offering the load goes bust. For example, does that mean the lqiuidators have a claim on your house ? That could be nasty.

[Caveat Mortgagor]

These are the "official rates" from HMRC.

http://www.hmrc.gov.uk/rates/interest-beneficial.htm

Just because her mortgage at 0.18% above base rate is technically "subsidised" why should she have to pay the difference when someone who has managed to secure a tracker mortgage at the same rate on the open market doesn't? It's absurd, and if it was me I'd challenge it to the very top.

Thanks, I knew someone would know of or find something I couldnt find.

So it may be a genuine post. However, I am a little shorter on the sympathy for people in this position. Whilst we are at it we could blame her ex for leaving her, or merv for dropping rates, the hmrc for not dropping their recognised rate ot her employer for mis-selling.

Hands up time, I didnt buy a house 10 years ago - instead I used the money i had earmarked for a deposit to buy a very expensive yet unreliable alfa romeo - its a decision I have learned to regret, but I am not blaming anyone else. Its not the car dealers fault, and I dont blame alfa romeo for producing pretty but rubbish cars.

[Berk-hater]

Thanks, I knew someone would know of or find something I couldnt find.

So it may be a genuine post. However, I am a little shorter on the sympathy for people in this position. Whilst we are at it we could blame her ex for leaving her, or merv for dropping rates, the hmrc for not dropping their recognised rate ot her employer for mis-selling.

Hands up time, I didnt buy a house 10 years ago - instead I used the money i had earmarked for a deposit to buy a very expensive yet unreliable alfa romeo - its a decision I have learned to regret, but I am not blaming anyone else. Its not the car dealers fault, and I dont blame alfa romeo for producing pretty but rubbish cars.

It took some finding believe me.

I have no more sympathy than you, just thought I'd give an argued view.

[Tiger Woods?]

Fine, but then they should tax all those people on tracker mortgages for the same reason! If HMRC can claim real base rates are 4.75% then the BoE is offically subsidising tracker mortgages all over the country. Why don't HMRC go after them as well?

SMI which is based on the average mortgage interest rate is at a lower rate than this (circa 1.69% lower). HMRC's position is completely indefensible, not that that means anything. In my opinion, since banks were giving away trackers even below base rate a few years ago, anything above base rate shouldn't be taxable.

[AndyAndy]

A couple of points.

1) HM Revenue and Customs ("HMRC") do not set the official rate of interest, statutory power to set the official rate of interest for the purpose of assessing the benefit in kind on employer provided subsidised loans was handed down to the Treasury by virtue of section 178 Finance Act 1989. By way of background HMRC and The Treasury are seperate bodies although the elected official ultimately responsible for HMRC is a Treasury Minister; The Exchequer Secretary to the Treasury - currently David Gauke.

2) The official rate of interest more or less tracked BoE base rates until 2008/9 when the BoE rate fell sharply as we know and the official rate did not. This was done under Labour which the Coalition have then continued so I doubt there is a political point to be made here. What is interesting is I guess like us the Treasury believe that the BoE rate is artificially low and will be heading up some time very soon to around 4%. OR they accept daft old Merv (I will dance on his grave) has lost control

3) The lady in question will be subject to tax and national insurance on her subsidised mortgage. So assuming she is a basic rate taxpayer, including NI that will be (very roughly) 30% of the difference between the rate she pays and the official rate. So if she was paying 2.5% and the employer discounted her rate to 0.5% then she would be paying 30% of the difference between 0.5% and 4.75% which would be 1.275%. Now her effective interest rate would be 1.275% plus 0.5%; ie 1.775% which I believe is better than the 2.5% I mentioned. So it is likely she is better off with her employer subsidised mortgage than not, even with the tax. I do not know what the fuss is about and I doubt very much making someone better off is misselling.

4) The employer is likely to be a bank and the subsidised loan will be treated like any other mortgage ; ie it will not be repayable if the bank fails although I imagine the interest rate may well adjust in the case of employer failure.

[Kyoto]

Hmm this is very relevant to us as we are about to sign on the dotted line for one of these - a base rate (+0%) tracker.

With last 2 years of falls and this as an option, it's finally made a house affordable for me.

As per Andys post above, we are operating on a calculation that the BIK will be "30% of the difference between 0.5% and 4.75%". Guess I need to double check!

[crash2006]

what i dont get is if she was paying = > then bank of england base rate why is she being taxed, the difference between the base rate and the commecial rate is a risk added rate so her employers giving it to here at base rate just means in my book that there is no risk, now if she was paying below the base rate then yer she should be taxed.

[Tiger Woods?]

3) The lady in question will be subject to tax and national insurance on her subsidised mortgage. So assuming she is a basic rate taxpayer, including NI that will be (very roughly) 30% of the difference between the rate she pays and the official rate. So if she was paying 2.5% and the employer discounted her rate to 0.5% then she would be paying 30% of the difference between 0.5% and 4.75% which would be 1.275%. Now her effective interest rate would be 1.275% plus 0.5%; ie 1.775% which I believe is better than the 2.5% I mentioned. So it is likely she is better off with her employer subsidised mortgage than not, even with the tax. I do not know what the fuss is about and I doubt very much making someone better off is misselling.

Her interest rate on her previous tracker would have been 0.68% and not the 2.5% you assume.

[AndyAndy]

what i dont get is if she was paying = > then bank of england base rate why is she being taxed, the difference between the base rate and the commecial rate is a risk added rate so her employers giving it to here at base rate just means in my book that there is no risk, now if she was paying below the base rate then yer she should be taxed.

Well the technical reason is because the comparator for the benefit in kind is the "official rate of interest" which is a rate set by the Treasury to assess things like this not the bank base rate. Why the official rate is different to the bank base rate when hisorically they have always been more or less the same is open to conjecture. Does the Treasury think the BoE rate is a short lived comedy rate set by the clowns of British economics? I do.

[AndyAndy]

Her interest rate on her previous tracker would have been 0.68% and not the 2.5% you assume.

Thats a fair point which I would have realisd if I'd bothered to go back to the original link. I doubt the bank has sought to act improperly. I imagine its trying to do the right thing by its employees and has not worked the implications through. The in house tax department that understands this calculation will be relatively unconnected from Human Resources which organises the discounted mortgages; I've yet to come across a Human Rersources team that works effectively with its sister Tax Department to understand this sort of thing.

I wonder if anyone has asked the treasury why the official rate is so high compared to the BOE rate when they have historically tracked. I think I might try and do that now.

[AndyAndy]

Sent to HM Treasury. I will post the reply they are obliged to give me when I receive it.

"Sirs

Historically the Official Rate of Interest set by HM Treasury has been broadly similar to the The Bank of England base rate. Since the rapid reduction in interest rates by the Bank of England in 2008/9 a substantial gap has opened up in the HM Treasury set Official Rate compared to the Bank of England rate. At present I understand from the HM Revenue and Customs web site the official rate of interest set by The Treasury is 4% for 2010/2011 while throughout that period the Bank of England base rate has been 0.5%. Could HM Treasury comment on whether the gap that has opened up between Band of England rates and the Official Rate is a change in policy or if not if there is any specific reason for the change."

Edited February 12, 2011 by AndyAndy

[CHF]

SMI is 3.08% so surely they should be the same (leaving aside any arguments about SMI)

[Georgia O'Keeffe]

Sent to HM Treasury. I will post the reply they are obliged to give me when I receive it.

"Sirs

Historically the Official Rate of Interest set by HM Treasury has been broadly similar to the The Bank of England base rate. Since the rapid reduction in interest rates by the Bank of England in 2008/9 a substantial gap has opened up in the HM Treasury set Official Rate compared to the Bank of England rate. At present I understand from the HM Revenue and Customs web site the official rate of interest set by The Treasury is 4% for 2010/2011 while throughout that period the Bank of England base rate has been 0.5%. Could HM Treasury comment on whether the gap that has opened up between Band of England rates and the Official Rate is a change in policy or if not if there is any specific reason for the change."

Dear Cat playing piano

Yes, we're fcked and will extend peak debt for as long as possible, hopefully events wont take over before my retirement

Yours Merv

Edited February 12, 2011 by Tamara De Lempicka

[Tiger Woods?]

Thats a fair point which I would have realisd if I'd bothered to go back to the original link. I doubt the bank has sought to act improperly. I imagine its trying to do the right thing by its employees and has not worked the implications through. The in house tax department that understands this calculation will be relatively unconnected from Human Resources which organises the discounted mortgages; I've yet to come across a Human Rersources team that works effectively with its sister Tax Department to understand this sort of thing.

I wonder if anyone has asked the treasury why the official rate is so high compared to the BOE rate when they have historically tracked. I think I might try and do that now.

I suppose my point was that, regardless of her personal circumstances, there are people on commercial rates of 0.68% (or less!) at present so it seems unjust that because she gets her loan through her employer her loan is judged against a norm which is not only higher than the lowest commercial rates, is actually significantly higher than the mean/median (unsure which) rate paid by others.

Edited February 12, 2011 by Tiger Woods?

[ey143]

Just to add some my thought to this subject:

1. I'm sure most of you know that the benchmark rate is now 4%, still bloody high

2. I posted a Freedom of Information Act request on this point - http://www.whatdotheyknow.com/request/rates_of_interest_for_used_to_be

I'm in the process of applying for a staff mortgage in the UK with a Spanish bank at 2% variable. But I will pay higher rate tax on the difference between 2 and 4% which effectively makes it cheaper for me in the short term to take out a competitor product. However, upside is that if I ever left my employer, I can keep my 1.5% above base rate for the term of the mortgage.

[porca misèria]

Fine, but then they should tax all those people on tracker mortgages for the same reason! If HMRC can claim real base rates are 4.75% then the BoE is offically subsidising tracker mortgages all over the country. Why don't HMRC go after them as well?

That'll be 'cos only hard-earned money qualifies for penal tax rates. Can't go around taxing those so unfortunate as to have an unearned windfall ...

[porca misèria]

Just because her mortgage at 0.18% above base rate is technically "subsidised" why should she have to pay the difference when someone who has managed to secure a tracker mortgage at the same rate on the open market doesn't? It's absurd, and if it was me I'd challenge it to the very top.

Sorry, no good. What matters is not the subsidy on her mortgage. It's the fact that the subsidy comes from her employer that turns it into earned income and so brings it within the tax net.