Child's occupation of ATED property can lead to a nasty surprise

The Annual Tax on Enveloped Dwellings (‘ATED’) is a yearly charge applying to high-value residential property which is held by a ‘non-natural person’, usually a company.

The issue

ATED is payable where the property was worth £500,000 or more on 1 April 2022 (or the date of purchase, if later). The charge ranges from £4,400 to £287,500 depending on the value of the property. It is reportable/payable based on a period running from 1 April each year.

There is a relief from ATED if the property is rented out to an unconnected third party on a commercial basis. Vacant periods will also qualify provided that there was always an intention to rent out the property to an unconnected third party. This means that if a company’s tenants move out in July but it cannot find replacement tenants until September, then it does not have to pay a month’s worth of ATED charge for the period that the property is empty, provided that it was looking for new tenants during that period.

However, if the property is available for occupation by a non-qualifying individual (i.e. someone connected to the company – regardless of whether they occupy or pay a rent), things can get more complicated.

Connected persons are those with a majority interest in the company, their immediate family such as linear ancestors and descendants and siblings, as well as any spouses or civil partners of any of these people.

Example

Barney is the sole shareholder of Rose Rentals Ltd. On 1 December 2022, Rose Rentals bought a residential property for £600,000, intending to rent it to third parties. For the 22/23 ATED period, Rose Rentals would initially be eligible for relief.

However, after struggling to find tenants, the company allows Barney’s son David live in the property from 1 July 2023 to 31 December 2023, while he is looking for somewhere else to live. After he moves out, they put the property back on the market and a third-party tenant finally moves in on 1 May 2024.

For the 23/24 ATED period, the property was being occupied by a non-qualifying individual for six months. You might think, therefore, that six months’ worth of the ATED charge would be due. However, occupation by a non-qualifying individual can withdraw relief both before and after the occupying period, regardless of intention.

Where the property is occupied by a non-qualifying person, the ATED charge applies from the date of the last qualifying occupation to the date of any new qualifying occupation. In this case the charge would run from 1 December 2022 (as the property was initially vacant) until 30 April 2024 – a total of 17 months!

Look back rules

The look back rules cannot extend further back than one prior ATED period. If the property had instead been bought in the 21/22 period, the look-back would only apply from 1 April 2022.

Look forward rules

If a new tenant had not been found, despite the company’s best intentions, David’s occupancy could affect the availability of the property relief for a further three ATED periods, up until 31 March 2027.

In these three years, the property would not be eligible for relief until it is actually occupied by a qualifying individual.

Hamilton Rose's view

The special rules where ATED affected properties are made available to non-qualifying individuals are complex and do not operate in an intuitive way. Furthermore, returns which were previously filed under the assumption/intention that the property would be rented out to third parties may need to be amended.

Technically, relief could be withdrawn by up to five years for just one day of non-qualifying occupancy, assuming that no qualifying occupants are found during the period.

The golden rule is therefore to avoid connected persons occupying ATED property at all costs. If a mistake is made then the company may want to consider evicting the problematic tenant as soon as possible and replacing them with a genuine third party tenant.