Special Report on Company Relocation: The package for packing up and going: Alison Eadie reports on the financial costs and tax implications for companies proposing to move their employees

THE COST of relocating employees has risen as a result of the slump in the housing market. The length of time taken to sell houses has increased the bill for companies, if they are providing bridging loans or if they have used a relocation agency to buy and resell the employee's house.

The result is that fewer career moves are taking place, according to Sue Shortland, manager of the CBI's employee relocation council. The value of the financial package offered to relocating employees has not gone down, but fewer employees are being offered relocation, she said.

The package usually includes all the direct costs of moving: estate agent's fees, removal costs, solicitor's bills, temporary accommodation or travelling allowance and a disturbance allowance which covers buying replacement carpets and curtains, reconnection charges for utilities, etc. Many companies offer the employee bridging finance or use a relocation agency to sell the house, paying interest until it is sold.

Some employers and staff have come badly unstuck because of the housing slump. Michael Tagg, national sales manager at PRIcoa Relocation Managements, said it had bought houses off companies which had previously managed their own relocations, that had been on the market for two years and had dropped 30-35 per cent in the period. The employee, who owed his employer on the bridging loan, was unable to drop the price because of the size of his debt.

Some employer bridging loans are not open-ended. Celia Baxter, of KPMG Management Consulting, said there had been cases where local authorities had removed the bridging loan after a certain period and asked the employee to work increased hours to pay the interest.

Relocation agencies maintain they can reduce the costs of relocation by providing a quicker service than employees or companies doing it themselves.

Nationwide Relocation claims savings of one third, using the example of an employee moving from a house valued at pounds 106,000. The savings, from pounds 27,000 by a company doing its own relocation, to pounds 18,440 using Nationwide's service, are largely in bridging costs, down from pounds 13,780 to pounds 7,420, based on the assumption Nationwide could sell the property within seven months against a national average of 12 months.

Mike Spencer, Nationwide's sales and marketing director, said companies had tightened up their policy on selling employees' homes. Whereas some used to allow employees to sell their own homes, they now typically cap the asking price at 5 per cent over the guaranteed price offered by a relocation agency. A few companies, worried by a falling market, have only agreed to underwrite their employees' losses up to 95 per cent of the guaranteed price.

Costs can also rise steeply if the company gives a mortgage subsidy to employees relocating from a low to a high cost housing area. The Inland Revenue allows tax relief on payments made to employees moving to a comparable property. The tax-free sums are based on a maximum house price differential of pounds 30,000 and the cost of borrowing at ruling market rates.

John Carolan, managing director of Black Horse Relocation, said the golden rule when an employer is considering financial assistance to relocate employees, is first to negotiate the scheme with the local Inspector of Taxes. Because tax relief concessions on moving expenses are extra-statutory and not binding on the Revenue, the interpretation varies between local offices.

The Revenue allows relief through two concessions: A5, covering removal expenses, and A67, covering mortgage subsidies, but only if the expenses are reasonable and the payment properly controlled.

The A5 concession covers the actual costs of removal, travel and subsistence costs incurred in finding a new home; a disturbance allowance, temporary accommodation and a bridging loan. The Revenue must be convinced the disturbance allowance does not benefit the employee, Mr Carolan said. If curtains are replaced, they must be of a similar quality, ie not new if those in the former home were old and worn.

The allowance can either be paid as a lump sum or on a piecemeal basis upon production of receipts by the employee. The maximum allowance for which receipts do not need to be produced is pounds 2,550 for a married employee, pounds 1,550 for a single householder and pounds 600 for a single non-householder. The A67 concession covers owned and rented property, when the move is to a roughly equivalent property: ie from a three-bedroom semi to another three-bedroom semi. The difference in house price is multiplied by the average mortgage interest rate after tax relief to give the extra amount the employee will have to pay each year. The maximum an employer can provide is pounds 18,060 tax free paid over a period usually between four and nine years.

The financial considerations of relocating abroad are far more complicated, affecting income and capital gains tax, investment earnings, pensions, life assurance, national insurance contributions, share options, mortgage repayments on a UK property, medical insurance and other matters.

The employer has to design a package which will ensure that the employee will be no worse off in net terms and after cost of living adjustments, according to George Yeandle, a partner in Coopers & Lybrand. The first major hurdle is deciding if the employee is to be classed as resident in the UK, non-resident, or resident but qualifying for 100 per cent relief against earnings - ie not subject to UK tax.

If the employee is to be working abroad for more than a full tax year, he would qualify as non-resident and avoid UK tax. He must, however, ensure that any business trips back to the UK did not involve substantive duties but were merely to report back. He may also not spend more than 62 nights or 90 full days in the UK in any tax year and must be careful not to fall foul of the Revenue rules on having a property available for use in the UK.

An employer's package to nonresidents would normally be designed to minimise overseas tax, but would also have to maintain long-term benefits like pension payments which might not be tax- efficient overseas.

Social security is a very important area where the rules may not match the tax rules, said Mr Yeandle. With social security costs very high in some countries, it may be advantageous for the employee to continue paying contributions in the UK even if he is non-resident for tax purposes, Mr Yeandle said.

Much depends on the tax and social security position in the relevant country. Coopers & Lybrand publishes a book entitled UK Nationals Working Abroad which contains an essential checklist of matters to consider before going, while away and before returning.

(Photograph omitted)