The popular advice that 'as long as you charge market rent and document everything, you can let to family and claim ATED relief' is structurally wrong. FA 2013 s.133 has two independent conditions that both must be satisfied for relief on any given day: (a) the dwelling is being exploited as a source of rents in the course of a qualifying property rental business run on a commercial basis and with a view to profit, which is the market-rent gateway; (b) no non-qualifying individual under s.136 is permitted to occupy the dwelling, which is the catalogue gateway. Market rent satisfies the first condition. The s.136 catalogue blocks the second for connected occupancy, regardless of rent level.

The s.136 catalogue covers eight categories: individuals entitled to the interest, connected persons under ITA 2007 s.993, partnership members, settlors of any trust where the trustees hold the interest, relatives of those individuals or settlors (parents, grandparents, children, grandchildren, siblings per ITA 2007 s.994), spouses or civil partners of those relatives, participants in collective investment schemes and persons connected to them. Multi-hop family connections are caught: the spouse of a settlor's sibling, the brother-in-law of a beneficial owner. The catalogue is wider than most owners assume.

Where the proposed occupant falls within the s.136 catalogue, the structurally-rational alternatives are de-envelopment (distribution-in-specie or sale to family member at market value, with SDLT, CGT and IT modelling) or acceptance of the full ATED plus CIHC cost as a strategic carry for the corporate envelope. The 'let at market rent and claim the relief' path almost never works for connected occupancy. This page walks the two-conditions decision tree, the s.136 catalogue applied to typical family-occupant scenarios, the s.145 employee-accommodation door with worked controlling-interest analysis, a genuine arm's-length commercial-let comparison, the de-envelopment alternative with full transaction-cost modelling, and 14 of the most common questions. For the s.135 clawback look-forward and look-back mechanic, see our ATED clawback page. For the strategic decision of whether to envelop at all, see our ATED pros and cons page. For the penalty mechanics on misclaimed relief, see our ATED penalties and appeals page.

The two-conditions decision tree

  1. Identify the proposed occupant. Director's daughter or son? Spouse of a partner in the partnership? Settlor of the trust holding the interest? Spouse of your sibling? CIS participant in the fund? Run through each of the s.136 eight categories with the prospective occupant.
  2. Apply the s.136 catalogue gateway (Condition (b) of s.133). If the occupant is within any of the 8 categories, relief is denied on that day regardless of rent. Stop here. Market rent does not cure the s.136 trigger.
  3. If outside the s.136 catalogue: apply the commercial-basis-and-view-to-profit gateway (Condition (a) of s.133). Test: is the rent at market level (comparable evidence); is the tenancy on standard AST terms (or RRA equivalent post-commencement); is the let intended to produce a profit after running costs; is the let documented contemporaneously? Mark each as pass or fail.
  4. If both conditions hold: s.133 relief is available. File the ATED return as a claim-only return; document the s.133 claim. ATED tax for that period is £0.
  5. If only Condition (a) holds (commercial-basis OK but occupant in s.136): relief is not available. Full ATED charge applies. Plus the s.135 clawback overlay (look-forward up to 3 subsequent chargeable periods plus look-back to earlier days) and the CIHC effect under CTA 2010 s.18N(3) (company becomes a CIHC; 25% main CT rate locked in on all rental and investment profits, no small-profits rate, no marginal relief).
  6. The honest restructure question. Given the combined ATED plus CIHC plus s.135 exposure for connected occupancy, the structurally-rational options are typically: (a) de-envelope the dwelling (sell to family member at market value, or distribute in specie, or use a solvent MVL); or (b) restructure via genuine s.145 employee accommodation if the controlling-interest carve-outs at s.146 and s.147 are cleared (which is rare in family-controlled companies).

The s.136 eight-category catalogue walked

The catalogue runs across eight cumulative categories.

  1. Category (a): individual entitled to the interest (otherwise than as partnership member). The natural-person owner or beneficiary if the structure is direct.
  2. Category (b): persons connected with category (a) per ITA 2007 s.993 and CTA 2010 ss.1122-1123. Catches relatives, spouses, business partners, controlled companies and connected trusts.
  3. Category (c): partnership members entitled (as partnership members) to the interest. Every partner where the interest is partnership-held.
  4. Category (d): settlors of any trust where the trustees hold the interest. Catches the settlor of an offshore corporate-trustee structure regardless of formal ownership chain.
  5. Category (e): relatives of category (a) or (d) individuals. Per ITA 2007 s.994: parents, grandparents, children, grandchildren, siblings. Step-relations and adopted relations are typically included.
  6. Category (f): spouses or civil partners of category (e) relatives. Multi-hop family extension.
  7. Category (g): participants in any collective investment scheme holding the interest. Fund and unit-trust structures.
  8. Category (h): persons connected with category (g) participants. CIS-participant family and controlled-company chain.

Categories (e) and (f) are the most-commonly under-estimated. The s.994 relative definition is narrow but the s.1122 connected-persons definition is wider and the operative HMRC interpretation may apply broader connection in borderline cases. Specialist tax advice is essential before any related-person tenancy decision.

Honeysuckle Holdings Limited: the family-occupant catalogue walk

Honeysuckle Holdings Limited (UK ltd-co; sole shareholder and director Mrs Honeysuckle; holds a £1.4m London flat acquired 2019 via the ltd-co for future family use). Mrs Honeysuckle's nephew Tom (her sister's son) is starting a London internship and wants to rent the flat. Mrs Honeysuckle is willing to charge full market rent of £42,000 a year plus put in place a formal AST. Question: does s.133 relief apply?

The s.136 catalogue walk runs as follows. Category (a) is not in play directly because Tom is not entitled to the interest; only Honeysuckle is entitled. Category (b) asks whether Tom is connected with Mrs Honeysuckle for s.136 purposes; per CTA 2010 s.1122, 'connected' is widely defined and immediate family plus spouses are caught. Tom is Mrs Honeysuckle's nephew (her sister's son); a nephew is technically not in the basic CTA 2010 s.1122 list of relatives, but s.1123 extends connection in some contexts. The operative HMRC interpretation should be checked at write time; the conservative position is that the connection bites.

Category (e) asks whether Tom is a relative of a category (a) or (d) individual. Mrs Honeysuckle is a connected person of the company per Category (b); her relatives are caught under Category (e). Per ITA 2007 s.994, 'relative' means 'brother, sister, ancestor or lineal descendant'. Tom is Mrs Honeysuckle's sister's son, that is a nephew relationship, not a direct lineal descendant. Whether nephew counts as 'relative' under ITA 2007 s.994 is contested historically; older HMRC interpretation excluded nieces and nephews from the s.994 list but the broader CTA 2010 s.1122 connection net may catch nonetheless. Category (f) only bites if Tom is a Category (e) relative.

The result is that the s.136 status of nieces and nephews is the contested edge case. If Tom is caught (the conservative position; HMRC may take this view via Category (b) connected-persons widely construed), s.133 relief is denied and Honeysuckle owes £9,450 annual ATED plus look-forward 3 chargeable periods if no qualifying-use day intervenes plus CIHC at 25% CT on rental. If Tom is not caught (the narrower interpretation; nephew falls outside both s.1122 connected-persons and s.994 relatives), s.133 relief is potentially available if Condition (a) commercial-basis is met.

The operational lesson is that even for an edge-case relationship (nephew), the analysis is non-trivial. Specialist tax advice is essential before arranging the let. The conservative position protects against penalty exposure; the aggressive position requires defensible legal analysis and contemporaneous documentation. The cost of an opinion is trivial relative to the multi-year ATED exposure if the position is wrong.

Magnolia Holdings Limited: the s.145 employee accommodation door and its carve-outs

Magnolia Holdings Limited (UK ltd-co; sole shareholder and director Mr Magnolia; holds a £1.1m London flat acquired 2018; intended as accommodation for a 'company secretary'). Mr Magnolia's wife Mrs Magnolia is the company secretary, paid £8,000 a year for company-secretarial duties. They wish to claim FA 2013 s.145 employee accommodation relief on the basis that Mrs Magnolia uses the flat to perform her duties (the company's registered office is at the flat).

The s.145(1) surface compliance: relief is available where the dwelling is provided to a qualifying employee for the performance of duties. Mrs Magnolia performs company-secretarial duties from the flat; surface compliance passes. But the s.146(1) controlling-interest carve-out provides that s.145 relief is not available where the employee has a 'material interest' in the company or is otherwise connected with controlling shareholders. Mrs Magnolia is the spouse of Mr Magnolia, who is the sole shareholder and sole director. Under s.146(2), Mrs Magnolia is treated as connected with the controlling shareholder; her 'material interest' is presumed via the spouse rule. The s.146 carve-out bites; s.145 relief is unavailable.

The s.147 further provisions add additional carve-outs for senior employees of substantial controlling shareholders; not the operative bite here because s.146 already excludes. The alternative under s.133 also fails: Mrs Magnolia is Mr Magnolia's spouse, hence a connected person under CTA 2010 s.1122 (Category (b) of s.136) and a relative of a connected person under Category (e); she is a non-qualifying individual under s.136. s.133 relief is denied regardless of market rent. The CIHC effect at s.18N(3) bites separately: connected occupancy defeats the carve-out, locking in the 25% CT main rate on rental income.

The result is that the 'company secretary' structure fails both s.145 (controlling-interest carve-out) and s.133 (s.136 catalogue). Magnolia owes the full ATED £9,450 plus CIHC-rate 25% CT on the £8,000 'rental' or imputed-benefit value (which under ITTOIA 2005 and CTA 2009 Part 4 plus the benefits-in-kind code may be additionally charged). The 'company secretary plus family member plus company provides the flat' structure is a popular but operationally-broken pattern. Specialist tax advice should have surfaced this before the structure was put in place.

Walnut Holdings Limited: the genuine arm's-length commercial let

Walnut Holdings Limited (UK ltd-co; sole shareholder and director Mr Walnut; holds a £1.8m London BTL). Mr Walnut wishes to let the BTL to Susan Ferris (a consultant he met professionally at an industry conference; she is unconnected to him and his family and the company). Market rent £58,000 a year; standard 12-month AST; deposit lodged; agent handles the letting.

The s.136 catalogue walk: Susan is not entitled to the interest (Category (a) does not bite). Susan is not connected with Mr Walnut for CTA 2010 s.1122 purposes; no family relationship, no business in common, no controlled-company or controlled-trust relationship (Category (b) does not bite). Susan is not a partnership member entitled to the interest (Category (c)). Susan is not a settlor of any trust holding the interest (Category (d)). Susan is not a relative or spouse of any Category (a) or (d) individual (Categories (e) and (f)). Susan is not a CIS participant or connected to one (Categories (g) and (h)). Susan is outside the s.136 catalogue. The catalogue gateway PASSES.

The s.133 commercial-basis test (Condition (a)): market rent £58,000 a year (comparable to similar London BTL units at similar value) passes 'commercial basis'. Profit-oriented: gross rental £58,000 minus running costs around £18,000 equals around £40,000 operating margin, passing 'with a view to profit'. Standard AST passes tenancy formality. Both conditions of s.133 pass. s.133 relief is available. Walnut files a claim-only ATED return; £0 ATED tax. Rental income is taxed at company CT (small-profits rate 19% if profits below £50,000 SPR limit per the associated-company divisor; marginal-relief band for higher profits; 25% main rate above £250,000 upper).

The CIHC analysis at company level: Susan is unconnected; s.18N(3) carve-out is preserved; the company is not a CIHC; small-profits rate and marginal relief are available. The genuine arm's-length commercial-let to an unconnected tenant produces the expected tax outcome: ATED £0 via s.133 relief; CT at 19 to 25% with CIHC carve-out preserved; Sch 55 risk minimised through timely claim-only return. The contrast with Honeysuckle and Magnolia illustrates why related-persons structures are operationally broken and arm's-length structures are tax-efficient.

Olive Property Holdings Limited: the de-envelopment alternative

Olive Property Holdings Limited (UK ltd-co; sole shareholder and director Mr Olive; bought a £1.6m Surrey home in 2018 via the ltd-co for family use; Mrs Olive and 2 children currently occupy and Mr Olive splits time between Surrey and a London rental flat). Question: keep enveloped or de-envelope?

Current position (enveloped). ATED £9,450 annual (band 2, £1m to £2m) with no relief (family occupancy; s.136 and s.18N(3) both bite). CIHC at 25% main rate on any company income (here no rental income, family-occupied) with no small-profits rate despite low profits. ECCTA director and PSC verification plus Companies House annual filings plus corporate accounting fees: around £1,800 to £3,000 a year. Lost PRR on eventual sale: if the company sells, the chargeable gain is at 25% CT; in contrast personal-name Mr Olive's PRR under TCGA 1992 ss.222-226 would typically give £0 CGT. Annual carry around £11,500 to £13,000 a year plus future-disposal CT exposure on top.

De-envelope option. Distribute the £1.6m property in specie to Mr Olive (or sell to him at market value). SDLT analysis: distribution-in-specie as return of capital may be SDLT-free if cleanly structured; debt assumption triggers SDLT (full residential rates 0, 2, 5, 10, 12 plus the 5% additional-dwelling surcharge from 31 October 2024). CT on the company's deemed disposal at market value: chargeable gain at 25% CT (CIHC); if cost £1.4m and value £1.6m, £200,000 gain at 25% equals £50,000 CT. IT on Mr Olive's side: if treated as dividend, £1.6m minus share capital of around £100 is effectively around £1.6m at additional-rate 39.35% equals around £630,000 IT. Capital-distribution route via MVL: CGT at 18% / 24% on around £1.6m equals up to £384,000 (less the £3,000 AEA). Total upfront de-envelope cost: around £400,000 to £700,000 depending on structuring and Mr Olive's marginal IT rate.

Post-de-envelope position. Mr Olive holds the £1.6m home personally. PRR applies to his main-residence use; spouse-deemed-occupation under TCGA 1992 s.222 may extend the relief. No ATED. No CIHC. No ECCTA per-director compliance for an inactive ltd-co (which may be wound up via MVL). Section 24 finance-cost restriction only relevant if mortgaged and let, not relevant here for an owner-occupier. On future sale, PRR potentially eliminates CGT entirely.

The verdict depends on holding-horizon, appreciation profile and Mr Olive's marginal IT rate. De-envelope is typically cost-effective compared with continuing enveloped: the £11,000 to £13,000 annual carry over a 10-plus year horizon (£110,000 to £130,000 cumulative) plus the eventual CGT exposure on company sale typically exceeds the upfront de-envelope cost. But the upfront cost is large and the structuring is specialist (SDLT plus CT plus IT plus capital-versus-income routes). Engage specialist tax and legal teams; the de-envelope is a major project, not a same-week decision.

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The CIHC parallel under CTA 2010 s.18N(3)

At company-tax level the parallel test under CTA 2010 s.18N(3) operates independently of the s.136 ATED test. The s.18N(3) connected-occupant exclusion list catches connected persons plus their spouses plus relatives of connected persons plus relatives' spouses. Where any of those persons occupies the company's UK residential dwelling, the company's qualifying-purpose carve-out from CIHC treatment is defeated; the company is a CIHC; the 25% CT main rate applies to all rental and investment profits regardless of profit level, with no small-profits rate and no marginal relief.

The s.18N(3) catalogue is parallel to but not identical to s.136. The s.18N(3) list does not include settlors or CIS participants (which s.136 catches under Categories (d) and (g)). Conversely, s.18N(3) catches some relatives-of-relatives chains that s.136 does not (verify the exact statutory scope at write). The two tests bite together for typical connected-person occupancy (director's spouse, director's adult child) but the analytical workstream needs to address both separately rather than collapsing them into a single connected-person test.

The CIHC consequence over a multi-year period can substantially exceed the headline ATED exposure where the company has material rental income from other unconnected dwellings or investment income. For a multi-property company with one connected-occupied dwelling, the CIHC effect locks the company into 25% on all profits across the whole portfolio. Specialist restructuring (segregating connected-occupied dwellings into a separate SPV) can preserve the small-profits rate on the unconnected-let portfolio but adds complexity and may not survive an HMRC anti-fragmentation challenge under the associated-companies rules.

The s.135 clawback overlay

A single day of non-qualifying-individual occupation under s.136 triggers FA 2013 s.135 with two extensions. The look-forward extension provides that no subsequent day in that chargeable period or in any of the subsequent 3 chargeable periods is relievable unless a s.133(1)(a) qualifying-use day intervenes. The look-back extension unwinds earlier days where the same relevant person was entitled unless a qualifying-use day intervenes between the earlier day and the non-qualifying-occupation day. A vacant period does not intervene; only genuine commercial letting to an unconnected tenant interposes.

For owners contemplating brief family visits, the look-forward 3-period extension is the operative shock. A single weekend of an adult child staying in the dwelling at year-end can poison the next 3 chargeable years of relief if the dwelling sits vacant or off-let pending refurbishment. The 4-week visit by an adult child between her own lettings can trigger a worst-case multi-year exposure of £128,800 on a £2.4m dwelling that would otherwise have been fully relief-covered.

For the full look-forward and look-back mechanic with worked arithmetic, see our ATED clawback page. The cross-link is bidirectional: clawback mechanic on the dedicated page; related-persons decision framework on this page.

Penalty exposure for misclaimed relief

Claiming s.133 relief on a return where non-qualifying occupation in fact occurred triggers Sch 24 inaccuracy on the original return. The under-declared chargeable amount is the basis for the penalty calculation. Behaviour-tiered: careless 0 to 30% (with 0% unprompted-within-12-months and 15% prompted floor); deliberate-not-concealed 20 to 70%; deliberate-concealed 30 to 100%. Offshore Category 2 (1.5x) or Category 3 (2.0x, up to 200% maximum) uplift applies for overseas-incorporated structures per Sch 24 paragraph 4A and SI 2011/975.

Plus Sch 55 escalator for any omitted s.163 ACA returns. Plus FA 2009 ss.101-102 interest on the unpaid ATED from the original due date. The disclosure-mitigation matrix is the operative lever: unprompted disclosure within 12 months of the non-qualifying-occupation event produces the lowest mitigation floor. HMRC's Digital Disclosure Service or a formal disclosure letter is the standard route. For the full Sch 55, Sch 56 and Sch 24 architecture see our ATED penalties and appeals page.

Frequently asked questions

The FAQ list above covers the family-let-at-market-rent question, the s.136 eight-category catalogue, the nephew edge-case analysis, the s.145 employee-accommodation door and its s.146 controlling-interest carve-out, the third-party-agent routing question, the narrow market-rent + related-person relief doors, the CIHC parallel at s.18N(3), the actual-cost arithmetic for denied relief, the s.135 clawback overlay, the de-envelopment alternative, the accept-the-charge fallback, the penalty exposure for misclaimed relief, the documentation supporting a defensible arm's-length let and the boundary of the s.136 catalogue. For the look-forward and look-back clawback mechanic, see our ATED clawback page. For the strategic decision of envelopment versus de-envelopment, see our ATED pros and cons page.

Next step

If you hold UK residential property through a company, partnership-with-corporate-member or CIS and you are contemplating letting (or already letting) the property to a family member, settlor, partner or other connected person, the s.136 catalogue analysis is the gateway question. Market rent is necessary but not sufficient where the occupant is within the catalogue; the structurally-rational alternatives are de-envelopment or acceptance of the full ATED plus CIHC carry. Specialist tax advice before the tenancy decision is the operationally protective step. Contact us via the form below to discuss your specific position.