ATED on Enveloped Properties

Section Summary: The Annual Tax on Enveloped Dwellings (ATED) targets residential properties owned by companies, aiming to discourage tax avoidance through corporate ownership.

Key Points:

  • ATED applies to residential properties valued above a specific threshold, owned by companies or similar entities.
  • The tax rate varies based on the property’s valuation and is updated annually.
  • Reliefs are available for properties used in rental businesses, property development, or as working farmhouses.

Main Principles: ATED is designed to prevent the use of corporate structures to avoid personal taxes on property, ensuring that companies owning high-value residential properties contribute fairly to tax revenues.

The Annual Tax on Enveloped Dwellings (ATED) is a tax targeting residential properties in the UK owned by companies, partnerships with corporate members, or collective investment schemes. Introduced to deter the practice of holding residential properties in corporate “envelopes” to avoid or minimise tax, ATED aims to ensure fair taxation across all forms of property ownership.

Who Needs to Pay ATED?

(SDLT Rates and Calculations>ATED on Enveloped Properties)

Eligible Entities If you own residential properties through a company, partnership with a corporate member, or a collective investment scheme, you may be liable to pay ATED. This tax is applicable to properties valued above specific thresholds, which are periodically updated. Property owners must check the latest valuation bands to determine if their properties fall under the ATED requirements.

Valuation Thresholds

  • As of the 2023 to 2024 fiscal year, properties valued above £500,000 are subject to ATED.
  • The valuation must be based on the property’s value on April 1, 2017, or when it was acquired, if later.

How ATED Works

(SDLT Rates and Calculations>ATED on Enveloped Properties)

Scenario: Charlie owns a residential property in London through his company, “Charlie’s Properties Ltd.” The property is valued at £2 million, which is above the current ATED threshold. This example will illustrate how ATED applies, how reliefs can be used, and the detailed charges involved.

ATED Calculation for Charlie’s Properties Ltd.

  1. Filing an ATED Return: Because the property’s value exceeds £500,000, Charlie’s Properties Ltd. must file an ATED return. The property falls into the “More than £2 million up to £5 million” category.
  2. Annual ATED Charge: For the fiscal year 2023 to 2024, the ATED charge for a property valued between £2 million and £5 million is £28,650. For the following year, 2024 to 2025, the charge increases to £30,550.

ATED Charges

(SDLT Rates and Calculations>ATED on Enveloped Properties)

For Properties Valued:

  1. More than £500,000 up to £1 million
    • Annual Charge for 2023 to 2024: £4,150
    • Annual Charge for 2024 to 2025: £4,400
  2. More than £1 million up to £2 million
    • Annual Charge for 2023 to 2024: £8,450
    • Annual Charge for 2024 to 2025: £9,000
  3. More than £2 million up to £5 million
    • Annual Charge for 2023 to 2024: £28,650
    • Annual Charge for 2024 to 2025: £30,550

Example Scenario: ATED Charge for a £2,000,000 Property

Scenario: Sam’s Investments Ltd. Sam’s Investments Ltd. owns a property valued at £2 million. This places the property in the “More than £2 million up to £5 million” category.

  • 2023 to 2024 ATED Charge: £28,650
  • 2024 to 2025 ATED Charge: £30,550

Application of Relief: If Sam’s Investments Ltd. can prove that the property is rented out to third parties and not used by Sam or any connected individuals, they could qualify for Rental Business Relief. This would involve:

  • Submitting a Detailed ATED Return: Indicating the claim for Rental Business Relief.
  • Maintaining Proper Documentation: Keeping records of rental agreements and proof of non-occupancy by connected persons.

 ATED Reliefs and Exemptions

(SDLT Rates and Calculations>ATED on Enveloped Properties)

The Annual Tax on Enveloped Dwellings (ATED) includes several reliefs and exemptions designed to mitigate or eliminate the tax liability for properties under specific conditions. These reliefs are important for ensuring that properties used in particular ways are not unfairly taxed under ATED. Below, we delve into the primary reliefs and exemptions available:

  1. Rental Business Relief

Eligibility Criteria:

  • Commercial Letting: This relief applies if the property is rented out to third parties on a commercial basis. The income from these rentals should be derived from a bona fide rental business.
  • Non-Owner Occupancy: The property must not be occupied by the owner or any connected persons. This includes relatives, business partners, or any entity related to the owner’s corporate structure.

Purpose:

  • Encouraging Rental Markets: This relief aims to support the rental market by ensuring that properties genuinely used for rental purposes are not subjected to the additional ATED charges.

Documentation Requirements:

  • Rental Agreements: Valid rental agreements must be maintained to demonstrate the commercial nature of the lettings.
  • Financial Records: Detailed financial records showing rental income and associated expenses should be kept to justify the relief claim.
  1. Property Development Relief

Eligibility Criteria:

  • Property Development Stock: The property must be held as stock in a property development business, indicating it is intended for resale post-development.
  • Development Activities: The company must be actively engaged in development activities, including construction, renovation, or conversion projects.

Purpose:

  • Supporting Development Projects: This relief encourages property development activities by exempting properties held as development stock from ATED, recognising the transitional nature of such holdings.

Documentation Requirements:

  • Development Plans: Comprehensive plans outlining the development projects should be available.
  • Sales Strategy: Evidence of marketing and sales strategies to sell the developed properties should be maintained.
  1. Farmhouses Relief

Eligibility Criteria:

  • Working Farmhouses: The relief applies to farmhouses that are part of a working farm and used by a qualifying farm worker or tenant farmer.
  • Occupancy Requirements: The farmhouse must be occupied by someone who is actively involved in farming activities on the associated land.

Purpose:

  • Agricultural Support: This relief supports agricultural activities by ensuring that farmhouses essential to farming operations are not unduly taxed.

Documentation Requirements:

  • Employment Records: Records showing the employment or tenancy of farm workers or tenant farmers residing in the farmhouse.
  • Farming Operations: Documentation of farming operations carried out on the land associated with the farmhouse.
  1. Other Reliefs and Exemptions

Charitable Use Relief:

  • Eligibility: Properties used for charitable purposes are exempt from ATED. This applies to properties owned by registered charities and used in furtherance of the charity’s objectives.
  • Purpose: Encourages the use of properties for charitable activities by exempting them from ATED.

Public Bodies and Social Housing Relief:

  • Eligibility: Properties held by public bodies or registered providers of social housing are exempt.
  • Purpose: Supports public sector and social housing providers by relieving them from ATED, recognising their role in providing essential services and housing.

Documentation Requirements for Other Reliefs:

  • Charity Registration: Documentation of the charity’s registration and proof of property use for charitable activities.
  • Public Body Status: Evidence of the public body’s status or registration as a provider of social housing.

Example Scenario: Applying ATED Reliefs

Scenario: “Sam’s Investments Ltd” owns a residential property valued at £2 million. The property is rented out to third parties on a commercial basis. To qualify for Rental Business Relief, Sam’s Investments Ltd must ensure the property is not used by any connected persons and must maintain detailed rental agreements and financial records.

Outcome: If the company meets all the criteria and provides the necessary documentation, it can file for Rental Business Relief, potentially reducing or eliminating the ATED charge for the property.

 

Compliance and Documentation

(SDLT Rates and Calculations>ATED on Enveloped Properties)

Ensuring Property Use Qualifies for Relief

Eligibility Verification:

  • Understand the Criteria: It’s essential to thoroughly understand the specific criteria for each relief. For example, Rental Business Relief requires that the property is rented out on a commercial basis and not used by the owner or connected persons. Similarly, Property Development Relief applies only if the property is held as stock with the intention to sell.
  • Review Property Use: Regularly review and document the actual use of the property to ensure it meets the eligibility requirements continuously. Any changes in use should be promptly recorded and assessed for their impact on the relief eligibility.

Maintaining Proper Documentation:

  • Detailed Records: Maintain comprehensive records including rental agreements, tenant details, development plans, and employment records for farm workers or tenant farmers. These documents serve as proof of compliance with the eligibility criteria for each relief.
  • Financial Documentation: Keep detailed financial records showing rental income, development expenses, and any other relevant financial transactions. These records should align with the property’s use and support the relief claims.
  • Periodic Valuations: Obtain periodic valuations of the property to ensure it remains within the relevant valuation band for ATED purposes. This helps in accurate reporting and tax calculation.

Risk of HMRC Enquiry

‘Pay Now, Check Later’ Approach:

  • Initial Acceptance: HMRC may initially accept ATED returns based on the procedural correctness of the documentation provided. This means that if the paperwork appears to be in order, the claim may be processed without immediate scrutiny.
  • Subsequent Verification: HMRC reserves the right to initiate inquiries within nine months of the submission. These inquiries aim to verify the validity of the ATED treatment applied, focusing particularly on high-value or complex transactions.

Preparing for HMRC Inquiries:

  • Readiness for Scrutiny: Ensure all documentation is readily accessible and accurately reflects the property’s use and the basis for relief claims. This readiness helps in promptly addressing any queries from HMRC.
  • Consistency in Documentation: Consistency between different types of documentation (e.g., financial records, rental agreements, development plans) is crucial. Discrepancies can trigger further scrutiny and potential disputes.
  • Professional Advice: Engage with tax professionals to review and prepare documentation. They can provide guidance on best practices for compliance and help in preparing for potential inquiries.

Example of HMRC Inquiry:

  • High-Value Transactions: If an entity claims Property Development Relief for a residential property valued at £10 million, HMRC might initiate an inquiry to verify the development intentions and the actual use of the property. Detailed development plans, timelines, and marketing strategies would be essential to justify the relief claim.
  • Complex Structures: For a corporate entity owning multiple properties with mixed uses, HMRC might scrutinise the classifications and the corresponding relief claims. Comprehensive documentation of the use and income from each property would be necessary.

Summary

Compliance and thorough documentation are critical when claiming ATED reliefs. Ensuring the property’s use aligns with the relief criteria and maintaining detailed records can help in substantiating claims and mitigating the risk of HMRC inquiries. Being prepared for potential scrutiny by HMRC involves consistent documentation, periodic reviews, and professional advice, ensuring that all claims are defensible and accurate.

 

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.