The COVID-19 pandemic has impacted all businesses in different ways since March 2020.  Businesses required to file an Annual Tax Enveloped Dwellings (ATED) return may be questioning how the COVID-19 pandemic will impact their 2021/22 ATED return, due to be submitted to HMRC by 30 April 2021.

Below are some of the queries and scenarios which have been raised recently and our broad view as to the potential impact on the ATED return. This guidance is general in nature and specific advice based on the facts of a case should always be sought.

Please note all comments are based on legislation and HMRC guidance as at 4 February 2021. There is no indication that HMRC intend to issue further guidance on this matter, but this does not rule out that they may do so closer to the filing deadline.

Recap - What is ATED?

ATED is an annual tax payable, mainly by companies (both UK and non-UK incorporated) that own UK residential property valued at more than £500,000 on 1 April 2017 (or acquisition/completion date if later).

The ATED regime also applies to such properties owned by:

• A partnership with a corporate member(s)
• A collective investment scheme, such as a unit trust or open-ended investment company

A property falls within the ATED regime if it is a dwelling and all, or part of it, is used, or could be used, as a residence and includes any land that is occupied or enjoyed as part of the dwelling (e.g. a garden).

Non-residential properties are outside the scope of ATED. There are also other properties that are not classed as dwellings, such as hotels, guest houses, boarding school accommodation, hospitals, student halls of residence, military accommodation, care homes and prisons.

Exemptions and reliefs

Reliefs are available if specific facts are present but an ATED return will still need to be completed and then relief claimed on the ATED return. Relief may be available for:

• Property rental businesses
• Properties opened to the public
• Property developers and traders
• Financial institutions acquiring properties in the course of lending
• The occupation of employees or partners
• Farmhouses
• Providers of social housing.

There are also exemptions for residential property owned by a charity and held for charitable purposes, properties held by public bodies and bodies established for national purposes, and properties conditionally exempt from inheritance tax.

COVID-19 related queries

What happens if the property’s value has now fallen below £500,000?

Whether a property falls within the ATED regime or not is determined by the property’s valuation at a specific valuation date. The current valuation date used is 1 April 2017, or acquisition date if later, with the next valuation date being 1 April 2022.

Therefore, if a property has decreased in value since 1 April 2017 or the acquisition date, and is now valued at less than £500,000, then an ATED return will still be required for 2021/22.

The valuation date for the 2022/23 ATED return is 1 April 22, therefore we may see properties which have decreased in value no longer being required to submit ATED returns for 2022/23 onwards. Please note however that HMRC have not yet confirmed the valuation bandings as at 1 April 2022 and there is every risk that the valuation amount could decrease, as has been the case at every review period since ATED was introduced.

Rental relief claims

Portfolio of residential properties used as holiday lets. Due to COVID-19 some bookings have been cancelled and the business has not been able to rent properties during much of 2020/21.

In order for the property rental business relief to apply, the following conditions need to be satisfied:

• The business must be a property rental business, and 
• It must be carried out on a commercial basis and with a view to a profit. 

Where a dwelling is not generating rents, the taxpayer may still be able to claim relief if they are taking steps to rent the property out without undue delay. 

HMRC ATED technical guidance states that:

‘Delay will be considered unavoidable if it is caused by factors wholly outside the control or influence of the owner of the property: for example, if it is severely damaged in a fire, or extensive works need to be undertaken to make the property inhabitable or to comply with legal requirements.’

By cancelling bookings, the business is complying with legal requirements therefore rental relief claim will still apply for 2020/21 and 2021/22 should further restrictions impact the period. The business would also need to ensure that they are taking steps to rent the properties i.e. still actively marketing the property for rent during periods where rental is legally possible.

It should be noted that any period of occupation by an individual connected to the company, when the property would otherwise have been let, will likely result in ATED rental relief not being available for such a period of occupation and will also be subject to look back and look forward provisions which could significantly impact the period relief is available for. 

A flat let to an unconnected individual. Due to travel restrictions arising from COVID-19, tenant has not been able to occupy property for much of the period as they have been stuck abroad.

As in scenario 1, for the property rental business relief to apply, the following conditions need to be satisfied: 

• The business must be a property rental business, and 
• It must be carried out on a commercial basis and with a view to a profit.

In this scenario, the flat is still let commercially with a view to profit but the tenant is just not occupying the property for much of the period due to travel restrictions. This is no different to a situation where a tenant had gone on holiday and the company would be unable to allow access to a new tenant. On the basis that the company is still letting the property, it would be unlikely that HMRC would challenge the validity of a rental relief claim.

A flat which is let to an unconnected individual. Due to unemployment, tenant granted reduced/rent free period.

In this case the property is still let, however a reduction or rent-free period may result in the rental no longer being deemed to be commercial. It could be argued that the let is still carried out with a view to profit because additional time and costs would otherwise be incurred by the landlord looking for another tenant, or by carrying out improvements, should they have not accepted the reduced/rental free period and the existing tenant then moved out. It would be hoped that HMRC would take a pragmatic approach in this scenario, considering the issues the landlord would face, and rental relief would still be available. Clearly if the property is let to a connected person on such terms then the ATED rental relief will not apply.

Property developer relief claim

In order for the property development business relief to apply, the following conditions need to be satisfied: The business must be a property development business, 

• Property is held so that it will be developed and resold as part of the property development trade, and
• A property development trade must be undertaken on a commercial basis and with a view to a profit.

There is no time limit imposed by legislation around how long the development must take before it is made available for sale, therefore we do not believe delays to developing a property will result in the property developer relief no longer being available. It should however be noted that excessive delays may bring into question whether the trade is still undertaken on a commercial basis. However, we would be hopeful that HMRC would not take this view given the shutdown of construction sites etc. during the pandemic.

Property trader relief claim

In order for the property trader business relief to apply, the following conditions need to be satisfied:

• The business must be a property development business, 
• Property is held as stock of the business with the sole purpose of resale in the course of the property development trade, and
• A property development trade must be carried on, on a commercial basis, and with a view to a profit.

Similarly, to property developers, there is no time limit imposed by legislation around how long a property can be held as stock prior to sale. 

HMRC guidance does state however that ‘If a company purchases a property in the expectation that in a few years’ time it will be able to sell the  property for a higher price that may not be sufficient to make the activity amount to a trade’. We would be hopeful that HMRC would take a pragmatic approach in such cases where sale delays have been caused by COVID-19 rather than because the client intends to hold the property for an extended period.

Dwellings opened to public relief claim

Enveloped estate with manor house. The estate and manor house are open to paying customers from March to October every year for guided tours. Due to lockdown restrictions resulting from COVID 19, the estate and manor house have not been able to open to customers for much of 2020/21.

For the ‘dwellings opened to the public’ relief to apply, legislation states that relief is due on any day if either of two conditions is satisfied:

• Condition 1 - the dwelling is being exploited as a source of income in the course of a qualifying trade in the normal course of which the public are offered the opportunity to make use of, stay in or otherwise enjoy the dwelling as customers of the trade on at least 28 days in any year (per FA 2013 s137(2)), or
• Condition 2 - that steps are being taken for it to be open to the public, for at least 28 days (in that or a future chargeable period), and that it will be so exploited without delay, except so far as delay is justified by commercial considerations or cannot otherwise be avoided (per section FA 2013 s137(3)). 

HMRC have published guidance relating to ‘dwellings opened to the public’ relief which states that:

• If the dwelling was opened for 28 days before 31 March 2021, relief will be available.
• If steps are being taken to open it to be open to the public but for reasons that cannot be avoided e.g. lockdown, it cannot be opened in the remaining months of the year, then relief still will be due for the period.
• If the COVID-19 current restrictions last all year (i.e. to 31 March 2022), relief will still be due so long as it is opened thereafter without undue delay.

As long as the company is opening the dwelling to the public on any day, or is taking active steps to do so without undue delay once the crisis is over, then the COVID-19 situation does not affect eligibility to this relief. 

Contact us

These are just some scenarios which may be relevant to businesses who prepare ATED returns. As ATED is a forward-looking tax, COVID-19 may have impacted the filing position of an already submitted return. If you would like to discuss this, or have a specific fact pattern that requires consideration prior to determining an ATED filing requirement, then please get in touch with Laura Ritchie, a member of our Corporate Tax team or your usual Johnston Carmichael contact.