Housing scheme for key workers 'may go belly up

The government's flagship scheme to house nurses, teachers and social workers could be wrecked by a hidden tax "bombshell", it emerged today.

The ?250m starter homes initiative (SHI) has been introduced to house 10,000 key public sector workers currently priced out of the housing market.

But housing professionals have warned that the initiative could "go belly up", because under the scheme key workers will face a tax bill of hundreds of pounds a year.

The problem, which has been concealed until now, has only emerged in new government guidance to those bidding for the scheme. The guidance, which has provoked widespread alarm, explains that if key workers get help with housing this could be counted as a taxable benefit from their employer for as long as they live in the home.

Even though the homes will be provided by housing associations, the tax problem arises because a requirement of the scheme is to involve the employers of key workers such as councils, police forces and health trusts as part of each bid.

It is feared that many key workers will be reluctant to take up the initiative because of the tax involved. But there is also concern that the viability of many of the schemes being put forward will also be threatened.

Most of the bids submitted to the government involve some form of so called shared ownership housing, under which key workers have to raise a mortgage for some of the cost of buying a home. Housing associations have pointed out that if key workers have to pay extra tax this will adversely affect their ability to raise money.

One housing association manager, who did not wished to be named for fear that criticism of initiative would affect his bid for cash under the scheme, estimated that the tax would reduce a key workers ability to borrow by up to ?8,000.

He said: "On a low income in a marginal housing market like London, that could make all the difference between buying a house or not."

Under his housing association's scheme, teachers would face tax bills of up to ?550 a year.

London Housing Federation policy officer Dino Patel said: "The who thing could go belly up if they don't sort this out. It's like a tax bombshell. This is about the lack of joined-up thinking in government. The left hand doesn't seem to know what the right hand is doing."

He also pointed out that employers such as councils could pull out of the scheme to avoid landing teachers and social workers with large tax bills.

"It is possible that they might get cold feet, which will undermine the whole concept of the starter homes initiative."

One London council official appeared to confirm those fears. She said: "We are very worried about it. If we did not see some resolution by October or November we would have to consider our position."

Another housing association director who did not wish to be named said: "When you realise the tax implications you can see how stupid it is, especially when this is targeted at people on low incomes in areas of high demand. It is a fairly adverse tax problem which seems to be run completely counter to the whole initiative."

Graham Douglas, deputy director of estates at the Metropolitan Police Force, which is bidding with a number of housing associations for cash under the scheme, said: "This would seem a little counterproductive and I hope that, having been made aware of it, DETR will negotiate with the Inland Revenue."

He added: "The danger is that the response to the scheme will be less than enthusiastic. I am concerned about anything that damages the initiative, because it is such a good idea and it has been needed for some time."

In a statement the DETR said: "Guidance on the tax implications of bids under the starter home initiative was included in the bidding guidance issued by the DETR last December. This advice was reiterated in the more detailed second stage bidding guidance. All bidders were therefore well aware of tax issues since the launch of the scheme.

"Benefits received by key workers under some schemes could be subject to tax and national insurance contributions - this is the position that applies to most benefits people receive by reason of their employment. There is no reason to believe in either case that it will seriously affect the delivery of the scheme or the ability of key workers to purchase properties.

"We are confident that a good set of schemes will be selected that will help a substantial number of key workers to purchase homes in areas where they could not otherwise afford to do so. That is what the initiative is all about."