Company-Owned Residential Properties & ATED

Most residential properties in the UK are owned by individuals. However, in cases where they are held within a corporate wrapper (i.e. owned by a Company) they are said to be enveloped and are subject to the Annual Tax on Enveloped Dwellings (“ATED”).

There are various reliefs and exemptions to the tax that may apply, but you should consider your requirement to make a return as the general deadline for submission is approaching (30 April 2017).

Background

Stamp Duty Land Tax (“SDLT”) is due on the transfer of any land/property within the UK at a rate between 3-12% (depending on price). In order to mitigate this charge some individuals would incorporate a company to purchase the property and then buy shares from the company (at a lower rate of stamp duty 0.5%). There were also potential Inheritance Tax (IHT) advantages depending on circumstances of the arrangement.

HMRC subsequently introduced ATED to target those attempting to mitigate tax in this way. The tax came into force from 1 April 2013 and is calculated over the period running 1 April to 31 March. The tax is pro-rated where the property is acquired or disposed of part way through the year or a relief only applies for part of the year. ATED returns and the associated liability need to be settled within 30 days of the chargeable period starting (i.e. 30 days from 1 April or from the date of acquisition).

Conditions

For the tax liability to arise a potential taxpayer must answer ‘yes’ to all of the following:

  • Do you meet the ownership condition?
  • Are you beneficially entitled to a single-dwelling interest?
  • Does that interest have a value in excess of the threshold?
  • Do none of the exemptions apply to you?
  • Are you unable to claim relief?

The ownership condition is met if the dwelling is owned by a company, a company which is a member of a partnership, or for the purposes of a collective investment scheme. Companies situated overseas are also within the charge to ATED if the land/property is in the UK.

The entitlement condition is met where a company is beneficially entitled to the interest in the dwelling but excludes entitlement in the capacity of a trustee or beneficiary under settlement. The consequences of these rules are that where a bare trust exists and the beneficial owner is an individual this will mean that there is no need for the beneficial owner to make a return.

The amount of ATED is based on the band into which the property value falls. At its inception the legislation allowed for a value of up to £2 million, but this fell to £1 million on 1 April 2015. The ‘value’ refers to the market value at 1 April 2012 (or later if acquired after that date). If the land/property value falls below the threshold then you are outside the scope of ATED and will not need to make the associated returns. You should note that there are ‘revaluation dates’ falling every five years, the next being 1 April 2017. In addition, where you increase the value of the property through a land transaction (extending a lease or acquiring attached land) a revaluation should be sought.

Certain types of living accommodation are specifically excluded, including, but not limited to: halls of residence, school pupil accommodation, hospitals or hospices, prisons and hotels.

Reliefs can be claimed for, amongst others: property rental businesses, dwellings open to the public, property developers, property traders and financial institutions. Where relief is claimed a return still needs to be made and it should be noted that where a ‘non-qualifying individual’ is permitted to occupy the dwelling no relief is available.

Occupation by a non-qualifying Individual

Where relief would normally be available because the dwelling is let within a commercial property business, it is withdrawn when the dwelling is occupied by a non-qualifying individual. A non-qualifying individual includes any person with an interest in the ownership of the dwelling or someone who is a ‘connected person’ to that individual (e.g. family member / business partner etc).

Changes

The threshold for ATED was originally £2 million, dropping to £1 million from April 2015. From 1 April 2017 the threshold drops to £500,000. This reduction is in addition to the 5 year revaluation deadline, as per the condition that dwellings must be revalued every 5 years. If you are using the original 1 April 2012 valuation you are due to review this imminently.

How can we help?

Given the complexities of exceptions and reliefs coupled with the restrictions on both Edge Tax can discuss the technicalities with you to determine your needs and, where appropriate, assist you in preparing the return.