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 rental arrangements in place and argued that relief is not available on the basis that the rental income generated was exceeded by expenses, including mortgage interest. Although HMRC's technical guidance does not specifically state that income must exceed expenses, it does state that the property rental business must be carried on "on a commercial basis" and "with a view to profit". HMRC's position seems to be that operating at a loss is not commercial and it is therefore open to HMRC to reject claims for this relief in these circumstances. In our view, this will not always be the case and claims should be reviewed in light of all relevant circumstances.
To protect against a potential challenge, taxpayers should consider whether there is sufficient evidence of a profit-seeking motive. Such evidence could include marketing the property to the public through an independent agent and/or ensuring that the property is let on standard third party terms. Clients should therefore be aware of the risk that HMRC may challenge whether a "qualifying property rental business" is actually being carried on and seek advice if they have any concerns.