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Case study:

ATED - UK residential property - case law update

18 June 2019

What constitutes a trade of property development? HMRC has successfully challenged an ATED relief claim at a First Tier Tribunal. In such instances, the combination of interest, penalties and the ATED charge itself can be significant. Businesses should review if their assumptions about ATED relief remain credible and, if not, whether it is appropriate to restructure.

The Annual tax on enveloped dwellings (ATED) is a tax on certain entities (‘non-natural persons’) holding UK residential property. It creates an annual tax charge based on the capital value of the property - although reliefs are available.

Hopscotch Ltd v Revenue and Customs Commissioners

April 2019 saw HMRC win at the First Tier Tribunal (FTT) which held that property redevelopment works themselves did not constitute to carrying out a property redevelopment trade.

The key aspects of the case were:-

  • Property was acquired in 1993. In 2014, having not been able to dispose of the property for three years, it was decided to maximise the value by significantly redeveloping it to “near new build” based on advice received from agents.
  • ATED was paid for 2013-16 and the relief available for property developers was claimed for years ending 2017 and 2018.
  • At the FTT, the key aspect considered was whether or not the company was carrying on a ‘trade’ or merely undertaking works to assist with the sale of an investment property.
  • The Court found that the transaction was not carried through in a way typical of a trade of property development. Accordingly, relief from ATED was denied.

Conclusions

We strongly anticipate that HMRC will continue to closely review the ownership of residential properties. With a slowing residential property market, holding properties for longer than expected will cause uncertainty over whether a ‘trade’ continues to be undertaken. At a minimum, this will cause potential share purchasers to be nervous about ATED liabilities vesting after purchase resulting in due diligence complexities.

More widely, those claiming other forms of relief (ie property rental business relief) should anticipate increased scrutiny. With the abolition of ATED-related gains from 6 April 2019, it may now be the time to de-envelope or at least revisit ownership structures.