Housing as a tax structuring instrument
The tight housing market and the growing skills shortage are presenting new challenges for employees and families. At the same time, interesting tax structuring possibilities can also ensue from the targeted provision or transfer of housing - be it for staff retention or intergenerational asset transfers. In the following section we discuss three structuring instruments.
1. Employer-provided housing as a perk -
Discounted housing for employees
In certain sectors this has long been the practice. The employer provides housing in order to retain employees at the location. This can offer tax benefits for both parties - provided that the rules in the legal framework are complied with.
- Classification for tax purposes - The provision of discounted or free housing is generally deemed to be a benefit-in-kind and is subject to payroll tax and social security contributions.
- Measuring the value - The determining criterion is the comparable average market rent for the local area - here the lowest value in the rental price range is used, plus utilities and service charges minus one third.
- Contractual arrangements - The right to reside normally ends with the termination of employment. A written agreement in the employment contract provides clarity.
2. Housing within the family -
Renting out to relatives
In the private sphere, renting out housing can likewise be attractive from a tax perspective - insofar as this meets the requirements of the local tax office. In particular, care is needed for tenancy agreements with close relatives.
- An arm's length test is necessary - The local tax office will only recognise a tenancy in the case of contracts that are effective under civil law with a standard market rent and proper statements of service charges.
- Rent in relation to comparable average market rent for the local area:
≥ 66 %
allowable costs fully deductible.
50 - 66 %
allowable costs deductible only if the surplus forecast is positive.
< 50 %
if the let is only partially remunerated than the allowable costs would likewise only be proportionately deductible.
- A spouse as a special case - Here, the local tax office frequently assumes that this is private use. Tax recognition would only be possible where there is a clearly defined business use and an arm’s length agreement.
3. Housing in intergenerational changeovers -
Transfer of property with a right to reside
The transfer of property to children or grandchildren early on provides considerable leeway for tax structuring - most notably if the previous owners secure a lifelong right to reside.
- Tax savings through a right to reside - The capital value of the right to reside is deducted from the value of the property (Section 14 of the German Valuation Act) and this substantially reduces the assessment base for gift tax.
- Use of tax-free allowances - It is possible to use the tax-free allowances for gifting once again after a 10-year period - this is a distinct advantage when compared with the one-time taxation of inheritance.
- Example: A property that is worth €1m is transferred to the children for €100,000. The remaining amount is covered by the tax-free allowances (2 × €400,000) and the value of the right to reside (€100,000). Ultimately, no gift tax is incurred - so long as the parents exceed the statistical life expectancy.
