The Annual Tax on Enveloped Dwellings (ATED) was introduced by the Finance Act 2013 and imposes an annual charge on corporate entities holding UK residential property worth more than £500,000. A penal fixed rate of 15% Stamp Duty Land Tax (SDLT) can also apply on the acquisition of UK residential property by a corporate entity. Relief is available for corporate entities running a "qualifying rental business", however we have seen a number of cases where HMRC has sought to deny taxpayers relief for loss-making rental businesses.
ATED and the fixed 15% SDLT rate are not generally intended to apply to companies carrying on genuine commercial activities and HMRC acknowledges several circumstances in which a corporate entity will be exempt from the charge. Among the available reliefs is the property rental business relief, applicable where a single-dwelling interest is owned and run as part of a "qualifying property rental business", i.e. a business operating with a view to making a profit.
In order to determine whether a period of ownership is relievable (or the 15% rate applies), HMRC will seek evidence that either:
The interest in the property is being exploited as a source of rent; or The person entitled to that interest is taking active steps with a view to exploiting the property as a source of rent. If steps are not taken and the property is left unoccupied for a significant period, HMRC will require a good commercial reason for the delay (for example, renovation or redecoration) in order to grant the relief. Recently, we have seen several cases where HMRC has challenged the commerciality of...