Companies hit by tax costs of owning dwellings

1st October 2019

Taxpayers are being hit with unexpected Stamp Duty land Tax (SDLT) and Annual Tax on Enveloped Dwellings (ATED) charges where dwellings are owned by a company.

The flat rate 15% SDLT charge and the ATED charge were introduced in 2012 but are still being widely misinterpreted and are costing corporate purchasers, and their advisors when it goes wrong, substantial unexpected tax charges, along with interest and penalties.

We are now seeing cases coming before the tribunals, and the findings are giving nasty surprises to the unwary.

The ATED / 15% SDLT regime applies if a company (or a partnership with a company member) acquires any single dwelling at a cost of more than £500,000.

Reliefs

There are a number of wide-ranging reliefs against ATED which allow genuine business users of such properties to avoid the charge, but these reliefs are highly conditional.

Firstly, the appropriate relief must be claimed on a Land Transaction Return. Code 35 is entered in box 9 of the return; hence these reliefs are widely referred to collectively as code 35 relief.

If the relief is not claimed, and the SDLT charge is computed at less than a flat 15%, the return is wrong, and the advisor is already on the back foot. HMRC will enquire and when that enquiry starts it may already be too late to resolve the problem.

The reason it may be too late is that backdated relief claims often do not work, because if the relief is not claimed it is reasonable to assume that the detailed discussion about the other conditions for relief has not taken place.

In that event, it is highly likely that one or more of the other conditions have already been breached and any breach within the first three years of ownership will trigger a complete clawback of the relief. Such relief will, therefore, be denied.

Given that the return was wrong in the first place, the advisor’s defence against a charge of negligence can be hard to argue.

Conditions

We have recently been involved in an upsurge in cases where purchasers are seeking recompense for tax, penalties and interest from their advisors on the grounds that the tax was avoidable had they been made aware of the conditions in time.

These other conditions are, essentially:

(1) The property must be acquired exclusively for one of the purposes within a specified relief group.

It is not enough that the property is used for a business purpose for the three-year period, but it must be acquired for that use, and a change of use within the three years may indicate that the acquisition was not for such an exclusive purpose.

If one seeks to claim successive relief under two headings, the first will have ceased within the period and the second was not a purpose for which the property was acquired, and would not have been claimed on acquisition, and problems ensue.

Furthermore, if a property is let, that letting must be a “business”. It must be operated on a proper commercial basis with a view to a profit, and it is not sufficient just to say that there is no clear private use and therefore it is business use.

To be safe from challenge, the intended use needs to be documented in some way – say by some correspondence or minutes of a meeting – and that use needs to be maintained for the whole of the three-year period.

(2) There must be no non-qualifying occupation.

Business use is not just limited to the charging of a commercial rate. If any non-qualifying individuals are allowed to occupy the property then, no matter what rent they are charged, that is non-qualifying occupation. If that occurs within three years of acquisition, the relief is clawed back.

Non-qualifying means someone connected with the purchaser, and “connection” has a wide meaning in this context potentially including the directors and shareholders, their spouses, their family, their spouse’s family and their family’s spouses – amongst others.

ATED return

If a property is potentially within the 15% flat rate, then, even if relief is claimed, it is within the scope of the ATED. Again, relief may be available and must be claimed by way of an on-line ATED return within 30 days of acquisition (and annually by 30 April thereafter).

This is often an afterthought and it is easy to suffer a penalty for a late ATED return.

Given this linkage between SDLT and ATED, an omission of one is clearly identifiable by HMRC. So whilst with ATED one can switch between reliefs with relative impunity, to declare such a change on an ATED return within the first three years will simply flag up the issue of the 15% SDLT claw back.

The difference between the flat rate charge and the normal corporate rate of SDLT for a dwelling has reduced, now that the additional 3% applies to all corporate dwelling purchases, but it is still a significant increase, potentially as much as £86,250 of extra, unnecessary tax and the purchaser will want someone to blame and be compensated. 

In so many cases that we see, this would be easily avoided with a little forethought. Once a problem has been identified, the sooner it is addressed the less likely it will be that the purchaser will inadvertently breach a condition. Time is of the essence, so seek advice quickly.

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