Mark McLaughlin looks at relief from the annual tax on enveloped dwellings for property development trades.
Companies holding residential property in the UK need to be wary of the annual tax on enveloped dwellings (ATED) (FA 2013, Pt 3, Schs 33-35).
ATED is charged annually on companies (and other ‘non-natural persons’) that hold an interest in a UK residential dwelling (a ‘single-dwelling interest’) worth more than a statutory threshold. ATED may be due if the UK residential property is valued at more than £500,000.
That’s a relief!
However, there are various reliefs and exemptions from ATED. For example, there is relief where the single-dwelling interest is used as a source of rents from a property rental business run commercially and with a view to profit.
In addition, relief from ATED may be claimed if a single-dwelling interest is held by a company etc. carrying on a property trading business, and the interest is held as trading stock for the purpose of resale in that property trading business.
Development or trading?
Another useful ATED relief may be claimed where a single-dwelling interest is held by the company etc. carrying on a commercial ‘property development trade’ so that the property will be developed and resold as part of that trade.
The company’s activities might include (say) the refurbishment of substantially the whole property (e.g. fitting new bedrooms) before resale, property extensions, or demolition of the property and replacement with a new property.
HM Revenue and Customs (HMRC) ATED technical guidance (tinyurl.com/HMRC-ATED-TG1) states (at para 36.3):
“It will be a question of fact as to whether a property developer’s trade is one of property development as opposed to property trader. An intention to carry out insubstantial or insignificant redecoration prior to a quick onward sale is not likely to be indicative of a property development business, and may be more indicative of a property trading business…”.
Development trade or investment asset?
In Hopscotch Ltd v Revenue and Customs [2020] UKUT 0294 (TCC), the appellant company purchased a residential property in 1993 for £1.25 million. Until 2007: (a) the property was occupied on occasions by persons permitted by the appellant’s directors; and (b) certain features were added to the property. From 2008 until the commencement of works on the property in April 2016, it was occupied solely by domestic staff. The company resolved to sell the property in 2011. It was placed on the market but remained unsold. The company decided to develop the property to achieve a higher sale price. The development work ended in September 2017. The redeveloped property was listed for sale in October 2017, but no buyer was found.
The company claimed relief from ATED on the basis that the property was held for a property development trade. HMRC rejected the claim. The First-tier Tribunal (FTT) concluded that the property had not ceased to be an investment. Subsequently, the Upper Tribunal (UT) held it was essential to consider whether the property had become an asset held for trading purposes. It was impossible to determine that question in the taxpayer’s favour without evidence of a change of intention for the property. The company’s appeal was dismissed.
Practical tip:
The UT’s decision includes a helpful summary of principles derived from case law on whether an asset is held for trading or non-trading purposes. The Hopscotch case can be accessed from the BAILII website.
