HM Revenue and Customs, Charity Commission and Housing Corporation Joint Guidance

Affordable Home Ownership and taxation liability

Paragraph

Introduction 1

Rented Housing 6

Home Ownership as a Charitable Activity10

Deciding whether a particular individual or family is a suitable beneficiary for a LCHO scheme 16

Household Income18

Reporting Public Benefit 22

HomeBuy Agents, Applicant Assessment and Charitable Status24

Housing Corporation Affordability Calculator30

Charitable Trading and HMRC Clearance Process34

Corporation Tax Self Assessment and Trading Subsidiaries41

Trading Subsidiaries in the RSL sector45

Accounting Requirements48

Examples51

When Affordable Home Ownership might be a Charitable Activity53

When Affordable Home Ownership might not be a Charitable

Activity64

Conclusion 69

Introduction

  1. Charity trustees have a duty to act in the best interests of their charity and are responsible for making decisions on how its resources can best be used to meet its objectives, to assist beneficiaries. Historically, charitable housing associations have mainly assisted beneficiaries through provision of rented housing.
  1. In line with wider social changes, many associations now seek to extend to beneficiaries the security afforded by asset ownership, through provision of affordable home ownership. However, it is necessary for charity trustees to be clear what charitable purpose they are furthering and to be satisfied that providing access to low cost housing ownership (LCHO) achieves this.
  1. The Housing Corporation’s (the Corporation) previous advice on affordable home ownership provision by charitable housing associations is contained in circular 29/94 (the 1994 circular), issued in August 1994 following advice from the Charity Commission (the Commission) and the former Department of the Environment, whose housing policy responsibilities are now delivered by the Communities and Local Government department (the CLG). But much has changed since 1994 and the time is right for updated guidance.
  1. A significant proportion of the new material in this guidance reflects the need for trustees to adopt a prudent and systematic approach so that their associations are both ensuring that their provision of affordable home ownership is charitable, and that they fully assess whether or not it is primary purpose trading for the purposes of charity tax law.
  1. To guide these decisions, trustees will want to take appropriate professional advice and it is recommended that they should do so wherever there is doubt about the charitable nature of an activity or about the tax liabilities arising. This guidance is issued jointly by HM Revenue and Customs (HMRC), the Commission and the Corporation. While this guidance stands within the general charity law provision of giving trustees information and advice, it cannot be taken as a definitive interpretation of either tax or charity law. Trustees should take adequate and appropriate advice on the specific circumstances of their own charity, its purposes and activities.

Rented Housing

  1. Rented housing remains the main way of helping people of limited means to meet their housing needs. Access to social rented housing is controlled through statutory criteria that function through a hierarchy of defined need, assessed by local authorities. This ensures that needs are assessed in a fair and consistent way.
  2. In addition to statutory criteria, households may have other requirements, for example around location or type of home. These requirements may be reasonable in themselves, although a landlord’s inability to meet these additional requirements may not be a reasonable basis on which to refuse the offer of a home. In terms of modern standards of housing management and maintenance in the social sector, and bearing in mind demand pressures, most social rented homes could be said to qualify as a reasonable offer of accommodation in most circumstances.
  3. Registered Social Landlords (RSLs) are required to assist local authorities in delivery of their housing functions. Assessments of need work to ensure that, in many parts of the country, access to social rented housing is available only to those who are homeless, at risk of becoming homeless, or who need to be rehoused quickly for reasons of health or personal safety. To an increasing extent, social rented housing is primarily a solution for those in extremes of need. Provision of social rented housing will be a charitable activity in almost every case.
  4. It has never been the case that housing need is uniform, but many households who, in previous years, might have expected to have their needs met through social rented provision now find that their level of need is insufficient to gain access to housing, in light of other pressures on landlords. Equally, some households whose needs might have been met in the private rented market may find that rising prices now make it impossible to secure adequate accommodation in the area where they need to live. There might be some scope for these households to move somewhere cheaper but for many, family, work or other commitments will constrain their choices.

Home Ownership as a Charitable Activity

  1. There are a number of charitable purposes which can be furthered by the provision of housing and within these, the provision of housing for sale may play a part. Many charitable housing associations have an object of relieving poverty by providing housing to persons in necessitous circumstances and in many cases involving LCHO this will be the relevant purpose to consider. In other cases it may be the relief of the needs of the elderly or people with disabilities.
  1. Some charitable housing associations provide low cost housing ownership to key workers. The charitable purpose being furthered here is promoting the effective application of resources for the charitable purposes which having the key worker in post will advance. Accordingly, the key workers themselves are not necessarily charitable beneficiaries. The charitable beneficiaries are those of the charitable purposes which are furthered by the key workers who are housed. However, it would clearly not be reasonable for a charity to provide assistance to such workers unless the following factors are present:
  • There is a need for the charitable service which the key worker will provide;
  • There is a shortage of such workers due to difficulties in recruiting and retaining key workers;
  • Those difficulties could by overcome by tackling the inability of suitable people to afford appropriate accommodation in the area.
  1. The Commission accepts as charitable, trusts to promote the effective application of resources for charitable purposes by providing accommodation for key workers. The Commission has also agreed that key workers with regard to a charitable purpose can be defined as follows:

“those persons (and their dependants living with them) who have need of such accommodation by virtue of:

(i)their employment in the public or voluntary sectors or in a relevant employment in the Locality in such manner or capacity as to advance education, relieve sickness, promote public health, relieve charitable need, protect human life and property, promote the sound administration of the law, or advance other charitable purposes for the general benefit of the community, including in particular (but without prejudice to the generality of the foregoing) the maintenance for the benefit of the community of its infrastructure, including supplies of gas, water, electricity and food, of transport and other means of communication, of telecommunication information and information technology services, and of emergency services; and

(ii)the fact that they could not afford from resources available to them to secure such accommodation on normal commercial terms.

and for the purposes of this object:

‘public sector’ means any department of central or local government or health or other statutory authority;

‘voluntary sector’ means charities and voluntary organisations;

“charities” means organisations which are established for exclusively charitable purposes in accordance with the law of England and Wales;

“voluntary organisations” mean independent organisations, which are established for purposes that add value to the community as a whole, or to a significant section of the community, and which are not permitted by their constitution to make a profit for private distribution. Voluntary organisations do not include local government or other statutory authorities.

“relevant employment” means employment by an employer which though not in the public or voluntary sector, is engaged in the provision of services equivalent to those referred to in sub clause (i) above.”

  1. There is also guidance from the CLG dealing with key workers and those whom it is reasonable to assist with accommodation, and for which applications for capital grants/allocations can be made to the Corporation. Provided the persons to be assisted under such guidance fall within the description of key workers in paragraph 12, there will be no difficulty in following such guidance. If the persons to be assisted under the guidance do not fall within the description of key workers in paragraph 12, it may not be charitable to assist them with accommodation as key workers.
  2. Many charitable housing associations have regeneration objects, i.e. they promote urban or rural regeneration in areas of social and economic deprivation. However, a regeneration object is an umbrella of various charitable purposes and it is necessary to be clear which purpose providing access to LCHO is furthering. The relevant purpose could be the relief of poverty or the relief of disability or the relief of the needs of the elderly. The Commission publication ‘Promotion of Urban and Rural Regeneration’ (RR2) (available at explains in detail when this activity can be charitable.
  3. Some LCHO schemes may promote mixed development as a more effective way of relieving poverty or need, for instance by ensuring that the environment is conducive to the long term relief of housing need for those where it arises due to poverty or other disadvantage.

Deciding whether a particular individual or family is a suitable beneficiary for a LCHO scheme

  1. In deciding whether a particular individual or family is a suitable beneficiary for a LCHO scheme, charity trustees will need to be clear about the charitable purpose which they are furthering and must ensure that they exercise their discretion in good faith and in a reasonable manner, properly informing themselves and taking into account relevant factors and disregarding irrelevant matters. Trustees should think about immediate circumstances and also the likelihood of foreseeable changes in circumstance, when making decisions.
  2. For instance, charity trustees may assess applicants against the following criteria:

1) Housing Need

In assessing whether an applicant is in necessitous circumstances , charity trustees could look at

(a) Suitability of present accommodation – Is any existing accommodation inadequate in all the circumstances of the case? In assessing suitability regard can be had to such matters as state of repair, health, employment, family responsibilities etc. If the existing accommodation is not inadequate, what is the charitable need which providing access to LCHO will relieve?

(b)The applicant’s financial circumstances (e.g. disposable income, savings etc.) weighed against such matters as the average local wage levels and whether he or she is able to find other accommodation at an affordable price or rent.

As a general guide, a person may be regarded as “poor” or in “necessitous circumstances” in the housing context, if he or she has insufficient means so that he or she can afford from all available resources neither the purchase price nor market rental of accommodation which is appropriate to maintain a modest and decent standard of living. However, this is only a general guide and charity trustees will need to consider each applicant’s circumstances individually. The consideration may include future changes to those circumstances that can reasonably be anticipated, for example a family in private rented accommodation losing that accommodation because its tenancy is at an end.

2)Appropriateness of relief of housing need by LCHO scheme.

In assessing whether it is appropriate for the charity to provide resources to relieve housing need in this way, the charity trustees could consider the following:

(i)Suitability of applicant’s needs for relief by LCHO i.e. is the type of accommodation suitable for this applicant’s housing need and can he or she afford to buy on the terms offered?

(ii)Is using the charity resources to provide the relief an effective use of the charity’s resources i.e. are the resources necessary for the LCHO scheme a cost-effective way of relieving housing need in the area concerned?

3)Safeguards against non-incidental private benefit

When shared ownership purchasers sell on, trustees should ensure that the home is resold on similar terms to a proper beneficiary household. Historically, shared ownership leases have contained a requirement that RSLs should seek subsequent purchasers from their own or local authority waiting lists. More recent shared ownership leases include a pre-emption right, meaning that residents are required to offer the home back to the RSL first, before seeking a purchaser elsewhere. These mechanisms work to enable trustees to find suitable purchasers for resales.

Household Income

  1. Housing need is closely related to household income. Those households who meet the statutory criteria for social rented housing have, in the vast majority of cases, levels of income which place the charitable status of that provision beyond doubt. As noted above, social renting will be charitable in almost every case.
  1. Beyond this group, decisions will sometimes be more finely balanced. For example, a household may be able to afford access to the private rented market but, for the reasons noted above, their housing conditions may be unsuitable in the long term, such that they would qualify as proper beneficiaries for assistance.
  1. In all cases, household income will be an important factor when considering whether an offer of affordable home ownership is an appropriate response. To guide trustees, the table below describes incomes for the English regions, in relation to the typical costs of affordable home ownership purchase. These figures reflect the likely household income of those who would generally be too well-off to qualify for social rented housing, but would still be proper beneficiaries for consideration for home ownership options.
  1. To be clear, the maxima shown in this table are not intended as an absolute cut-off. Rather, they are markers to flag where the bounds of activities that are demonstrably charitable begin to shade into activities which may well be charitable, in the context of factors other than income, such as those in the table below.

Region / Lower Quartile House price
(HMLR 2006) / Household Income required
(3.5 income multiple)*
East / £133,500 / £38,143
East Midlands / £105,000 / £30,000
London / £183,000 / £52,286
North East / £80,000 / £22,857
North West / £88,000 / £25,143
South East / £150,000 / £42,857
South West / £135,000 / £38,571
West Midlands / £107,000 / £30,571
Yorkshire and The Humber / £90,000 / £25,714
England / £119,000 / £34,000
* Based on 100% purchase (interest rate does not affect this figure).

Reporting Public Benefit

  1. The Charities Act 2006 includes a number of changes relating to public benefit. Although these changes are not expected to come into force until 2008, the Charity Commission has begun work on preparing guidance on the operation of the public benefit requirement. At the time of writing, the consideration of responses to the Commission’s consultation on this subject is ongoing on the legal requirements for charity reporting. The proposal is that charity annual reports should include information about how the charity meets the public benefit requirement. Larger charities, in particular, will be required to provide a detailed account of how the charity's purposes have provided benefit to the public during the year being reported on. [This paragraph to be amended to reflect outcomes from the consultation, which closed on 14 September 2007.]
  1. The Charity Commission draft public benefit guidance sets out a framework for considering public benefit. The four headline principles are:
  • There must be an identifiable benefit.
  • Benefit must be to the public or a section of the public.
  • People on low incomes must be able to benefit.
  • Any private benefit must be incidental.

HomeBuy Agents, Applicant Assessment and Charitable Status

  1. The government’s priorities for affordable housing are not in themselves necessarily charitable. Accordingly, eligibility under these schemes does not necessarily mean the provision of LCHO will be charitable. Paragraphs 28 to 31 set out details of these priorities.
  1. Homes for sale that are provided as part of the government's investment programme for affordable housing are prioritised for certain groups:
  • existing social renting tenants.
  • households in priority housing need, as assessed against statutory criteria.
  • key workers, as defined by CLG.
  • first time buyers and others identified as priority groups by Regional Housing Boards (RHBs)(some of whom may be key workers).
  1. There are further, specific criteria where homes are targeted at key workers, older purchasers and people with a disability.
  1. Initial assessment of applicant suitability is undertaken by HomeBuy Agents (HBAs). The role of HBAs is to:
  • determine eligibility according to the headline criteria noted above
  • advise applicants of the options available to them
  • process applications, including carrying out a preliminary financial assessment.
  1. To achieve maximum benefit for public funding, shared ownership purchasers must buy the largest share of a home which they can afford and sustain. The Corporation recommends use of its affordability calculator (explained in paragraphs 29 to 33). Applicants will also be recommended to the HBA's retained panel of Independent Financial Advisers for a detailed and more rigorous affordability check.
  1. It is possible that not all applicants recommended through the HBA process will be proper beneficiaries for every charitable RSL. The judgement may be a fine one. Trustees should review all relevant circumstances and consider the principles described in this guidance, to inform their decision.

Housing Corporation Affordability Calculator

  1. Assessments of affordability are usually made using income multipliers. Another approach is to use the affordability calculator which has been developed by the Housing Corporation, specifically for affordable home ownership products. The calculator has five variables:
  • mortgage interest rate;
  • initial rent as a percentage of the unowned share of the home;
  • percentage share purchased;
  • annual service charges; and
  • mortgage period.
  1. The calculator relates the market value of the home, household income, any deposit towards purchase, and other monthly financial commitments, in order to show the costs of purchase as a percentage of net income. The Corporation recommends that costs should not exceed 45-50% of net income, in most circumstances.
  1. An example of how this might work in practice. An applicant for New Build HomeBuy has an income of £34,000 and also has a deposit of £5,000 to put towards the purchase of the home. The home they are seeking to purchase has a value of £190,000, a rent charge on the retained equity share of 2.75% and a service charge of £1,320 p.a. So assuming an interest rate of 6.50%, and a mortgage repayment period of 25 years the individual can afford a 50% share as this would require a minimum annual income of £34,000. Applying the principle of not exceeding 45% of net income the applicant’s costs as a proportion of their net income will be 45% or equivalent to an income multiplier of 2.99 making the purchase in this example affordable.
  1. The judgement here is in identifying a sustainable level for purchase, given that affordable home ownership purchasers will not be as affluent as home owners generally. The affordability calculator can be viewed at

Charitable Trading and HMRC Clearance Process