My client’s British Virgin Islands (BVI) company owns a UK residential property, worth about £10m. My client lives overseas, and the property was previously let, but it has been unoccupied since the last tenant left about five years ago. The property had become somewhat dilapidated, and now needs a substantial amount of refurbishment work in order to bring it up to the necessary standard to enable it to be re-let. My client had no urgent need to do this, but the introduction of the annual tax on enveloped properties (ATED) has provided an incentive to carry out the necessary works and re-let the property, in order to qualify for the property rental business ATED relief. I note that FA 2013 s 133(1)(b) appears to allow the relief where ‘steps are being taken’ to carry on a property rental business. If my client starts the refurbishment work now, it should be possible to let the property by April 2014, but what will the position be for 2013/14?
I assume that the BVI company is the beneficial owner of the property and not simply a nominee (in which case there would be no liability to ATED). It is of course possible to de-envelope or sell the property in order to avoid ATED, but as you have not mentioned this, I assume that your client wishes to retain the current structure.
ATED is an annual tax, so if your client has not yet taken any steps to let the property, the company is initially liable to the full annual charge for 2013/14, on the basis that it was liable on the first day of that period, 1 April 2013 (FA 2013 s 99(2)). However, it may then claim interim relief in order to reduce the charge pro rata by reference to the number of days remaining in 2013/14 from the day on which it takes steps to let the property (FA 2013 s 100). Interim relief may be claimed either in the 2013/14 ATED return or, if later, in an amended return which must be submitted by 31 March 2014.
If steps are going to be taken to let the property, it is therefore a case of ‘the sooner, the better’.
In Annual Tax on Enveloped Dwellings: Technical Guidance (available from HMRC’s website), HMRC states at para 31.6:
‘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. The sorts of activities that would constitute steps for the purposes of this relief would include:
‘However, those steps must reasonably be expected to lead to the letting of the property. For example, if the dwelling is located in Knightsbridge, advertising it in Newcastle will not meet the test of steps being taken to find a tenant. Similarly, advertising the property at a rent that is unlikely to be achieved will again not meet the test of steps being taken to find a tenant.’
The legislation also requires that the steps are taken ‘without undue delay’ (FA 2013 s 133(1)(b)). Here, HMRC states, at para 31.8 in its technical guidance: ‘A delay in generating rent will be justified if that results from commercial considerations or was unavoidable.’
HMRC considers that commercial considerations include works undertaken after the departure of a tenant to improve the property, such as repairs or redecorating. An unavoidable delay includes a delay due to undertaking extensive works to make the property habitable or to comply with legal requirements.
In your client’s circumstances, the company should qualify for interim relief for 2013/14 from the date on which it gives instructions for the refurbishment work by, for example, instructing a letting agent to oversee the work and advertise the property for letting as soon as possible thereafter.
HMRC states that a taxpayer should support a claim for relief in relation to a property rental business that is to be carried on with evidence of when they expect to be able to exploit the property to generate income.
In practical terms, as the deadline for filing the 2013/14 ATED return is 1 October 2013, and the deadline for paying the 2013/14 liability is 31 October 2013, your client will need to ascertain whether the value of the property on 1 April 2012 is in the £5–10m band or the £10–20m band, in order to calculate the liability, subject to a deduction for the interim relief to be claimed. It should be noted that ATED cannot be paid until a reference number is received from HMRC following submission of the return.
Although HMRC offers a ‘pre-return banding check’ which confirms in which band the property falls, HMRC has stated that this can take up to 30 days, so it is probably now too late to request this for 2013/14. A professional valuation of the property as at 1 April 2012 should be obtained as soon as possible; there is a considerable difference between the annual charge of £35,000 for a property worth £5–10m, and the charge of £70,000 for a property worth £10–20m.
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