‘No looking back’ – one ATED tax trap to avoid

Author: Helena Luckhurst

This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

April is ATED filing month – 2017/2018 ATED tax returns must be filed and any ATED tax paid by 30 April at the latest. Even if no ATED is due, because a relief from ATED applies, that relief still needs to be claimed on an ATED tax return, which must be submitted by the end April deadline just the same.

ATED applies to companies owning UK let residential property too. However, a 100% relief from ATED is available if the company is running a property rental business and the relief is claimed each year.

One crucial trap to guard against is occupation of the company’s property by a ‘non-qualifying individual’. These include people who are ‘connected to’ the company, in the very wide sense conferred on that phrase by section 1122 Corporation Taxes Act 2010.  For example, the settlor of a trust which owns an interest in the corporate entity which owns the property will count as a ‘non-qualifying individual’, as will the settlor’s relatives – meaning siblings, and either ancestral or lineal descendants – and even their respective spouses and their families!

The non-qualifying individual has to be ‘permitted to occupy’, according to the ATED legislation, which may give an escape route if the directors of the company were not aware of the occupation and therefore could not have given permission, implied or express. Unfortunately there is no definition of what ‘permitted to occupy’ means, either in the legislation or in HMRC’s ATED Technical Guidance.  However, in the content of other taxes, HMRC regards use of a property as occupation if the person who does stay at the property or uses it has a right of access to it and does keep belongings there.  No guidance is also given on how long a period of occupation is needed in order to trigger these provisions.  In an example given in the Technical Guidance, a month of occupation was long enough but there is no discussion of whether a week or even a few days would have been problematic.  Therefore, it’s best to try to avoid these murky waters if possible.

It is relatively easy for companies to find themselves in trouble over non-qualifying occupation. The family member who stayed a few nights in the company’s London flat, in the void period between lettings, is a classic situation but unfortunately this can lead to an unhappy outcome.  The consequences of non-qualifying occupation can be severe:

  • ATED relief is denied for the whole of the ATED tax year in which the non-qualifying occupation takes place, unless there was a qualifying tenant renting the property as part of a property rental business prior to the non-qualifying occupation (in which case relief will be allowed for the period of ‘qualifying’ occupation).
  • Relief is also denied for up to the next three ATED tax years, until such time as there is ‘qualifying occupation’.
  • ATED relief is withdrawn for the previous ATED tax year if, in fact, there was no qualifying occupation during that tax year. (This could be the case if the company was taking steps to rent out the property, such as alterations or redecoration, for which ATED relief is available if the steps are taken without undue delay.)

The look forward and look back provisions can result in companies owing ATED for tax years in which it was thought that an ATED relief was due. The position needs to be corrected by submission of an amended ATED tax return for all years affected, as quickly as possible as time deadlines apply to the tax return filing.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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