The most common ATED relief, Property Rental Business Relief under s.133 Finance Act 2013, requires the dwelling to be let to a tenant who is not connected with the holding company on commercial terms. The "commercial terms" element is widely understood: an open-market rent, a standard AST, evidence of arm's-length negotiation. The "not connected" element is widely misunderstood: most directors expect that paying full market rent through a properly-documented tenancy cures the family-letting position. It does not. The connection under s.1122 CTA 2010 is a status test; the rent does not affect it. This page walks through ten family-letting scenarios in turn, sets out HMRC's likely stance on each, and closes with the documentary discipline that supports relief in the cases where it is genuinely available.

For the wider statutory mechanics of the rental relief (commercial-terms test, voids, refurbishment, joint-tenancy patterns), see the sibling rental property relief mechanics guide. For the consequence when relief has been granted and is then lost through a non-qualifying occupation, see the sibling clawback page.

The Statutory Position in One Paragraph

Section 133 FA 2013 grants relief for a dwelling that forms part of a property rental business carried on with a view to profit, where the dwelling is let on a commercial basis to a person who is not connected with the holding company. "Connected" picks up s.1122 CTA 2010, which catches the directors, the participators (broadly the shareholders), their spouses and civil partners, their parents, children, siblings, business partners, the spouses of all of those, and the controlled companies of any of the above. The HMRC ATED Manual at ATED20100 extends the catch to participators in collective investment schemes and settlors of underlying settlements where applicable. The market-rent question is independent of the connection question; the rent does not affect status.

Ten Family-Letting Scenarios with HMRC's Stance

Scenario 1: Director's Adult Child, Full Market Rent, Formal AST

UK Ltd holds a £1.4m London flat. The director's 24-year-old daughter, working professionally and earning enough to support market rent, occupies the flat on a 12-month AST at £2,200 per month (the open-market rate confirmed by Foxtons comparables). Bank statements show monthly rent transfers. HMRC's stance: connected; relief unavailable. The daughter is a child of the director and connected under s.1122 CTA 2010. The market-rent, the formal AST, and the rent-receipt evidence are all irrelevant to the connection test.

Scenario 2: Director's Elderly Parent, Bridging Stay at Market Rent

UK Ltd holds a £950,000 flat. The director's 78-year-old mother, whose main residence is being sold and not yet replaced, moves into the corporate flat on a 12-month tenancy at full market rent (£1,800 per month) while the new house is being found. HMRC's stance: connected; relief unavailable. Parents are caught under s.1122. The director's instinct that "she's paying market rent for a bridging period, what's the issue?" does not match the statutory position. Families in this situation often respond by paying the ATED charge for the year(s) the parent occupies and committing to a permanent solution within 12 to 24 months.

Scenario 3: Director's Sibling and Sibling-in-Law at Market Rent

UK Ltd holds a £1.7m flat. The director's brother and his wife occupy the flat under a joint AST at market rent. HMRC's stance: connected on both names. Siblings are connected; spouses of siblings are connected through the spouse-extension of s.1122. The joint-tenancy structure does not save the relief. The brother's wife was sometimes argued (pre-2014 case law) as a possible escape route; HMRC's published position from 2014 onwards is clear that brothers-in-law and sisters-in-law are caught.

Scenario 4: Divorced Ex-Spouse, Decree Absolute Granted, Market Rent

UK Ltd holds a £1.3m flat. The director's ex-wife, divorced two years ago with decree absolute granted, lets the flat at market rent under a 12-month AST. HMRC's stance: not connected; relief potentially available. Section 1122 CTA 2010 requires the spousal relationship to exist at the relevant time; a former spouse where decree absolute has been granted is not a spouse and is not within the s.1122 catch. The relief depends on commercial-terms evidence, but the connection barrier is absent. Practical watch-points: a continued maintenance arrangement dressed as rent (where the ex-spouse pays "rent" that is then returned via maintenance payments) defeats the commercial-terms test and is a known HMRC enquiry trigger; ensure the rent flow is clean.

Scenario 5: Cohabiting Unmarried Partner at Market Rent

UK Ltd holds a £1.6m flat. The director's long-term cohabiting partner (unmarried, no civil partnership) occupies the flat at market rent under an AST. HMRC's stance: position depends on the relationship's nature. Cohabiting unmarried partners are not spouses or civil partners under s.1122 in the strict statutory sense. HMRC may argue connection on the wider "person acting together with the director" basis, or treat the relationship as akin to spouse-equivalent for ATED purposes. The case law is thin and the position is contestable. Property Tax Partners' practice in unclear cases is to consider the cohabitant connected for relief-claim purposes and file the ATED return without relief, then assess whether to make an in-year claim if the relationship status changes.

Scenario 6: Director's Mother-in-Law (Spouse's Parent) at Market Rent

UK Ltd holds a £1.2m flat. The director's wife's mother occupies the flat at market rent. HMRC's stance: connected. Section 1122 extends connection through the director's spouse to the spouse's relatives. The mother-in-law is connected. The same applies to a spouse's father, the spouse's siblings, and the spouse's children (the director's step-children where the spouse has children from a prior relationship).

Scenario 7: Co-Shareholder A's Adult Child Lets Property; Co-Shareholder B Is the Director

UK Ltd is owned 50/50 by shareholders A and B. Shareholder B is the sole director. The property is let to shareholder A's adult child. HMRC's stance: connected. The connection runs through shareholder A's participator status. Section 1122 catches the adult child as a relative of shareholder A; shareholder A is connected with the company through participator status; therefore the adult child is connected with the company. Relief unavailable.

Scenario 8: Group Holding Company Provides Dwelling to Operating Sub's Relocating Employees

HoldCo owns OperCo. HoldCo holds a £2.1m Mayfair flat. OperCo uses the flat for an incoming relocating employee (unrelated, no shareholding) on a 9-month secondment from a US office. HMRC's stance: Property Rental Business Relief unavailable; Employee Accommodation Relief under s.145 FA 2013 potentially available. OperCo is connected with HoldCo (group company), so s.133 relief fails. Section 145 carves out the use case where the dwelling is provided to a qualifying employee for the performance of duties; the employee must not be a director, 10-per-cent-or-more shareholder, or a connected person of either. The relocating US employee on a clean secondment letter typically qualifies. The s.145 conditions must be documented at the time the dwelling provision begins; retrospective claims are weak.

Scenario 9: Family Trust Settlement Holds Company Shares; Settlor's Adult Child Lets the Dwelling

Discretionary family trust holds 100 per cent of UK Ltd. UK Ltd holds a £1.8m flat. The trust's settlor (a high-net-worth individual) has an adult child who lets the flat from UK Ltd at full market rent. HMRC's stance: connected. The ATED Manual extends connection through settlement-look-through: the settlor is treated as connected with the property held indirectly through the trust structure, and persons connected with the settlor are themselves connected with the holding company. The settlor's adult child is therefore connected. Relief under s.133 fails.

Scenario 10: Lease-and-Sublease Chain to Family Member via Controlled Company

UK Ltd holds a £2.4m flat. UK Ltd grants a 5-year commercial lease to OtherCo at market rent; OtherCo (wholly owned by the same director) then licences occupation to the director's adult son under an internal arrangement. HMRC's stance: substance over form; the chain does not break the connection. OtherCo is a controlled company of the director, connected under s.1122; the eventual occupier is connected through s.1122 directly. HMRC's One-to-Many compliance letters specifically target lease-and-sublease chains where the ultimate occupier is family-related. Relief fails; the worse-case interpretation is that the company has filed an incorrect return claiming relief, which engages the FA 2009 Sch 24 inaccuracy regime.

Evidence Discipline for the Cases Where Relief IS Available

Where the tenant is genuinely unconnected (Scenario 4 ex-spouse, Scenario 8 unrelated relocating employee under s.145, any standard PRS tenancy with an unrelated occupier), the relief claim depends on the documentary file. Five anchors:

  1. Tenancy agreement. Standard AST for residential lets, formal lease for longer-term arrangements, licence where appropriate. Date-stamped, signed by both parties, identifying the tenant with full legal name and ID reference.
  2. Marketing evidence. The letting-agent instruction letter, the online listing screenshots, the comparable advertising effort. Where the let happened through personal introduction without public advertising, a written record of the introduction and the absence of family / business link is the substitute.
  3. Rent collection records. Monthly bank statements showing the rent received to the company's account, in the name of the tenant. No back-and-forth flows that could be characterised as side arrangements.
  4. Tenant due-diligence. Right-to-rent check, ID copy (passport or driving licence), employment confirmation or income evidence where the tenant is an individual; corporate due-diligence where the tenant is a company.
  5. Arm's-length negotiation evidence. Email chain showing offer, counter-offer, signed acceptance. The negotiation does not need to be heavy, but the absence of any negotiation record on a let to a family-related individual is itself an enquiry trigger.

The audit trail is built up at the time of the let, not after an HMRC enquiry. The cost of building the file is modest; the cost of not having it when HMRC sends an enquiry letter is the loss of the relief plus penalty exposure under FA 2009 Sch 24.

What to Do If HMRC Disagrees on a Genuinely Unrelated Let

HMRC sometimes takes a stricter view than the facts support, particularly where the relationship between the parties has any historic family or business connection. Three response steps:

  1. Provide the five-anchor evidence in full. The enquiry letter sets out HMRC's concern; the response should map each concern to a specific document. Where a concern cannot be answered (e.g. no marketing evidence because the tenant was a friend-of-a-friend), provide the alternative evidence (the email chain confirming the absence of family / business link).
  2. Engage at officer level. Most ATED relief enquiries settle at officer level once the evidence is in front of HMRC. The Statement of Reasons or closure notice is the gating decision. Property Tax Partners' practice is to engage proactively at this stage rather than wait for the closure notice.
  3. Escalate where the officer position is wrong. Internal HMRC review, then First-tier Tribunal appeal. The appeal route under FA 2009 Sch 55 or the discovery-assessment route depending on the case. The sibling ATED appeals guide covers the FTT route in detail.

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