HM Revenue and Customs, the Charity Commission and the Housing Corporation have recently issued draft joint guidance on affordable home ownership and taxation liability. The guidance is the first to be issued on the subject since the Housing Corporation circular (29/94) issued in 1994. Little of what it contains is new, but it is helpful in providing clarity on issues that may have become confused over the past fourteen years. Traditionally, charitable RSLs have assisted their beneficiaries through the provision of rented housing, but more recently many have sought to do so by offering low cost housing ownership (LCHO). The new guidance makes clear that if a charitable RSL offers LCHO options, this must be an appropriate means of meeting the needs of those in necessitous circumstances, and simply not a means of avoiding tax.
The guidance sets out criteria for charitable RSLs to follow when assessing whether applicants for LCHO qualify as charitable beneficiaries. In terms of an applicant’s financial status, a person will generally be regarded as “poor” or in “necessitous circumstances” if he or she cannot afford the purchase price nor market rental of accommodation that would provide a “modest and decent standard of living”.
Charitable RSLs should consider whether it is appropriate for an applicant to be assisted by LCHO rather than by other means, and whether LCHO is a cost-effective way of using their resources to meet housing need. When shared ownership purchasers move on, the RSL should ensure that the home is resold on terms similar to those upon which it was sold originally, either through it having a right of first refusal on the sale, or by requiring that purchasers are taken from their own or local authority waiting lists.
The guidance does though acknowledge that while some people may earn too much to qualify for social rented housing, their income may still be low enough for them to qualify for LCHO options. Guideline maximum annual household income figures, linked to average lower quartile house prices by region, are provided to give an indication of who would fall into this bracket. The guidance states that the earnings figures it provides aren’t absolutes and that in some circumstances households earning more than those amounts will still be regarded as suitable charitable beneficiaries.
The guidance also provides some clarity with regard to what will be regarded as primary purpose trading by RSLs (primary purpose trading is an activity which furthers a charity’s objects, the profits from which are not normally subject to tax) and non-primary purpose trading (which does not further the charity’s objects, and the profits from which are taxable). It will usually be clear which of these two categories a charitable RSL’s work falls into. However, there will be occasions on which it is less clear, most probably when an RSL in engaging in mixed development.
The guidance makes clear however that instances in which the receipts from shared ownership sales to persons who would not qualify as charitable beneficiaries will be tax exempt (because the proceeds are being used to fund charitable activities) will be rare. A series of sample scenarios are provided, which are designed to give indications of when LCHO will and will not be regarded as a charitable activity. In instances in which it is not clear whether the proceeds from a development will be taxable or not, RSLs can apply to HM Revenue and Customs for a ruling.