ATED: HMRC tax enquiries and investigations

HMRC, the UK tax authority, has been clamping down more heavily on landlords where there are unresolved ATED (Annual Tax on Enveloped Dwellings) issues, ommissions or errors. The ATED annual tax is due where a UK property is held in an “enveloped” structure such as via a company, unless reliefs or exemptions apply. The ATED tax is substantial. For the tax year 2023/2024 the annual tax is £28,650 for a property in the banding range £2m to £5m and £67,050 for property valued in the range between £5m and £10m. Therefore the ATED tax issue is of crucial importance.

Reliefs apply where a property rental business is “commercially” carried on or for property developers or property traders. However, such exemptions are complex and difficult to interpret correctly and professional advice should be sought.

Recent HMRC tax investigations on ATED-related issues have included instances where reliefs have been claimed:

  • Valuation issues: HMRC disagrees with the value of the property; e.g at 1 April 2017 which is used for banding for purposes of the ATED returns between 2018 and 2022. The property needs to be revalued every 5 years and 1 April 2022 was the revaluation date for the next 5 years commencing from 2023/2024.
  • Rental values too low: HMRC does not accept the property has been “commercially” let out – i.e that the rents charged are not “market value” rents e.g. where not let out through a professional letting agency.
  • Undue delay in letting out the property: where the landlord has claimed the letting relief but is not taking the appropriate “steps” to secure the letting of the property without “undue delay”.
  • Preparation for sale: Where there is delay in the preparation for sale, demolishment or conversion of the property where letting relief has previously been claimed.
  • Property development trade: is genuine or not and issues surrounding the transfer of the property from the “revenue” account to the “capital” account.
  • Property trader: must be genuinely involved in buying and selling property on a commercial basis to make a profit. Leaving a property on a company’s balance sheet for a number of years waiting for it to appreciate in value before selling it, is not property trading.

There are many more ATED tax issues involving HMRC investigations. The above are only just a few examples. It is critical that professional advice is taken once an enquiry letter from HMRC is received.