Tom Biggs ACA CTA, explains the Annual Tax on Enveloped Dwellings and what you need to look out for.
Do you hold UK residential property through a limited company?
When did you last get a valuation for this property?
If your answer to the first question was yes, and the property is above a certain value, then this means you fall within a specific tax regime in the form of the Annual Tax on Enveloped Dwellings (ATED). This means you may be liable to pay an annual tax charge on your property, or properties, if your company has a stake in more than one.
Read on to find out more about ATED, the annual charge amounts, the need for revaluation of properties, and where potential reliefs and exemptions to the regime can be applied.
What is ATED?
ATED is a tax levied on companies (wherever they are registered), or partnerships, where a limited company is a partner which owns UK residential property worth more than the £500,000 threshold. In instances where this is applicable, tax is then payable annually in advance with the charge dependent on the property value.
The ATED return period runs from 1 April with returns then due, and the tax is required to be paid, by 30 April. There are specific rules about when a property comes within the regime and if its status changes during a year, for example through a sale or purchase.
ATED was introduced as an anti-avoidance measure to try and make it less attractive for companies to hold high value UK residential properties. Additionally, where a property is acquired part way through a chargeable period, an ATED return is required to be submitted and the tax paid within 30 days of the acquisition (if valued over the £500,000 threshold).
The rates of taxation - ATED charges
The amount payable varies based on the value of the property as set out below.
Annual ATED charge
> £500,000 up to £1m
> £1m up to £2m
> £2m up to £5m
> £5m up to £10m
> £10m up to £20m
A case of revaluation
For the 2023/24 tax year, and the purposes of this tax regime, property has to be revalued with a revaluation date of 1 April 2022. If you acquired the property after that date, the value when the acquisition was made will be used instead.
This means you may need to obtain a professional valuation, or calculate the value yourself if you're able to do so, if your company holds residential property that's likely to be above, or close to, the £500,000 threshold.
If valuing yourself, there needs to be a reasonable and justifiable basis for the figure you produce. A valuation obtained for mortgage purposes within the last 12 months may suffice. Per HMRC's guidance, valuations must be made on an open-market willing buyer, willing seller basis, and be a specific amount.
The valuation will then apply for the next 5 years meaning it will be applicable up to, and including, the 2027/28 tax year.
Where a limited company owns a UK dwelling worth more than the threshold and tax is due, an ATED return is required for each property. Reliefs are available from ATED tax but they can only be claimed in a return. If no return is made but it was due, penalties are charged even if available reliefs would reduce the tax liability to nil.
Possible reliefs and exemptions from ATED
There are certain exemptions from the regime which may mean a return doesn't need to be completed, notably charitable companies using the dwelling for charitable purposes.
Under normal circumstances each flat in a block of flats will be treated as a separate dwelling. The following are not treated as dwellings for ATED purposes:
Student halls of residence
Boarding school accommodation
Companies owning UK dwellings will need to consider properties on a property-by-property basis to establish if reliefs are available. A dwelling might get relief from ATED if it is:
Let to a third party on a commercial basis and isn't, at any time, occupied (or available for occupation) by anyone connected with the owner
Part of a property trading business and isn't, at any time, occupied (or available for occupation) by anyone connected with the owner
Part of a property developers trade where the dwelling is acquired as part of a property development business, and the property was purchased with the intention to re-develop and sell it on and isn't, at any time, occupied (or available for occupation) by anyone connected with the owner
A farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker, or their surviving spouse or civil partner
For the use of employees of the company, for the company's commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee's duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
Open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
A dwelling acquired by a financial institution in the course of lending
Owned by a provider of social housing
Additional aspects of the legislation
The legislation has special provisions that deal with/catch many unusual situations (e.g. joint ownership by company and individual/trust/partnership).
There are also “look forward” and “look backward” provisions where a property is occupied by an individual connected to the company. In such instances, you should seek advice before a connected person occupies a property.
In addition to the annual tax, a separate Capital Gains Tax charge applies to dwellings where ATED is payable.
The legislation is long and complex, and HMRC's explanatory booklet on ATED guidance runs to over 90 pages. This means it's important to take advice if you think ATED applies to your circumstances. Please note the legislation is a lot more complex than what is covered in this blog post summary!
Be sure therefore to get in touch, to request a free review to understand the potential exposure of your property portfolio to this tax regime.
The content of this post is up to date and relevant as at 28/10/2014 and updated on 21/06/2023.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.