Annual tax on enveloped dwellings

Are you considering buying a residential property through a company rather than personally? Or do you already own a property through a corporate entity? If so, there are significant tax implications that you may not be aware of.  As well as Stamp Duty Land Tax at 15% on any purchase of residential property made now, there is also an annual tax charge based on the value of the property and this applies even if the non natural person already owns the property.

Background

The Annual Tax on Enveloped Dwellings (ATED) is a tax charged where a non-natural person (company, partnership with a corporate partner or collective investment scheme) owns UK residential property valued at more than £2 million. ATED was introduced following the 2012 Budget to close a loophole and ensure that both individuals and companies pay their fair share of tax on UK residential property.

Previously Stamp Duty Land Tax was avoided by using a company or other entity to own the property. The package of measures introduced by the government were designed to discourage the use of enveloping properties within companies, encourage the de-enveloping of properties already held by non natural persons and to tax those who continue to hold them in this way.

Scope

An ATED return is required to be completed in relation to any UK residential property that is valued at more than £2 million on 1 April 2012, or at acquisition if later and is owned (wholly or partly) by a company, a partnership where a company is one of the partners or a collective investment scheme.

The ATED charge is payable annually based upon the value of the property. The latest ATED bands and charges are listed below.

Property value

Annual chargeable amount 2014/15

More than £2 million but not more than £5 million

£15,400

More than £5 million but not more than £10 million

£35,900

More than £10 million but not more than £20 million

£71,850

More than £20 million

£143,750

These amounts are increased each year in line with the previous years September Consumer Price Index.

The chargeable period for ATED is from 1 April to 31 March so is similar to the tax year we are all used to. However, unlike other tax returns which are completed after the tax year, the returns and payment of ATED are due by the 30 April within the period, so it is vital that people are aware of the requirement and ensure that this is done on time. Penalties can be charged for late returns and payment of ATED.

Where a property is purchased part way through the year, the return needs to be filed and payment of ATED made within 30 days of the acquisition which could easily be overlooked.  Where a dwelling is only subject to ATED for part of a year, a pro-rata charge will apply.

If you are in the process of building a property that will be valued at more than £2 million, you will also be caught by the ATED charge. The property will come within the charge to ATED at the earliest of being occupied or existing for Council Tax purposes and an ATED return is due within 90 days of this date.

Expansion to ATED following the 2014 Budget

During the 2014 Budget the Chancellor announced that the scope of ATED was to be expanded for all UK residential properties valued at £500,000 or more. This reduced threshold was estimated to bring a further 36,000 non-natural persons within the charge to ATED as clearly it would cover many more properties in the UK.

The new legislation is being phased in with properties valued over £1 million coming into charge from 1 April 2015 and from 1 April 2016, the band for properties valued greater than £500,000 but less than £1 million being introduced.

The annual charge for properties valued between £1 and £2 million for the 2015/16 year will be £7,000 and for properties over £500,000, will be £3,500 for 2016/17.

In 2015/16 any ATED returns and payments required for properties valued between £1 and £2 million will have a special rule which extends the filing deadline to 1 October 2015 and the payment deadline to 31 October 2015. This is the only time this rule will be available. In 2016/17 where an ATED return is required for a property valued over £500,000, the normal 30 April 2016 will apply.

Reliefs available

So by now you may be panicking that you will have to pay a substantial ATED liability over to HM Revenue & Customs. However, depending on the circumstances that mean the property is held by a non natural person, there are a number of reliefs available which can reduce an ATED liability to zero.

Please be aware that where the reliefs are applicable, an ATED return must still be completed and the relief claimed on the return. You are currently required to claim the relief on an ATED return on an annual basis.

Reliefs are available for:

  • Property rental businesses
  • Dwellings open to the public
  • Property developers
  • Property traders carrying on a property trading business
  • Financial institutions acquiring dwellings in the course of lending
  • Dwellings used for trade purposes
  • Farmhouses
  • Providers of social housing

There are also some situations where there are total exemptions from the tax. The most common of these is for charitable companies where the use of the dwelling is for charitable purposes. In these circumstances a return may not be required to be filed but if you think that this is the case seek professional advice to make sure.

The future

As well as the expansion to the scope of ATED following the Budget, there are some other potential future changes. HM Revenue & Customs have recently issued a consultation document in relation to reducing the administrative burden of completing ATED returns following the increase in the number of properties affected by ATED after the 2014 Finance Bill.

HM Revenue and Customs have asked for feedback on two options to reduce the administrative requirements of ATED and this consultation closes on 16 September 2014. Following the consultation, the responses will be reviewed and further changes could be made to the ATED legislation.

The first option that is being considered is only applicable to those with several properties that fall within the ATED legislation. It looks to at introducing a single return for all the properties to be submitted by the normal due date and also an additional supplementary return that would be submitted post year end to allow for the inclusion of any additional properties acquired in the period or adjustment for any properties disposed of. This would be instead of having to file a return for each property where there is a relief available to reduce the ATED liability to nil. It is unlikely that this will affect many people but would seem a logical step.

The second option suggested by HM Revenue & Customs would allow those entitled to claim a relief that reduced their ATED liability to nil to apply for exempt status from filing returns. This status would then be reviewed at a set interval by HMRC. This would seem to be a logical step provided the process of applying for exempt status was not onerous itself and would reduce the burden of completing returns once exempt status was received.

If you are concerned about any property that you currently own through a non natural person, or would like to discuss the affect of the ATED legislation on a future purchase you may make, please do not hesitate to contact us.

Kerryl Steel, Tax Consultant

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