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The Annual Tax on Enveloped Dwellings (ATED) was introduced to discourage the acquisition of high value residential properties through companies and other ‘non-natural persons’.
When the ATED rules were introduced, non-UK domiciled individuals in particular could gain tax advantages by acquiring residential properties through companies in a number of ways. For inheritance tax purposes, the acquisition of the property through a non-UK company ensured that it remained non-UK situs and therefore outside the scope of UK inheritance tax while a subsequent sale of the property could be effected by transferring the shares which would therefore not attract any stamp duty land tax charge. If the shares were in a non-UK company, the sale would not even attract 0.5% stamp duty.
Since the introduction of the rules, the position in relation to inheritance tax has changed; however, the ATED rules remain in place and, indeed, their application has widened. Originally introduced to cover properties valued at £2m or more, the rules now apply to properties valued at £500k or more.
Currently, the ATED applies where:
The current 2018/19 ATED rates are as follows
|Property value||Annual charge|
|More than £500,000 but not more than £1 million||£3,600|
|More than £1 million but not more than £2 million||£7,250|
|More than £2 million but not more than £5 million||£24,250|
|More than £5 million but not more than £10 million||£56,550|
|More than £10 million but not more than £20 million||£113,400|
|More than £20 million||£226,950|
If the property was purchased part way through the year, a pro-rated charge is calculated based on the period of ownership.
The amount of ATED due each year depends on the value of the property. A valuation of the property must be made every 5 years and must be an open market value.
Certain companies holding UK residential properties held are not subject to the ATED charge.
In particular, the following are excluded from being treated as ‘dwellings’ for ATED purposes:
• Purpose built accommodation for students or members of the armed forces
• Homes for the care of the elderly or children.
Additionally, there are reliefs which can reduce the ATED charge to nil and these include where a property is:
• Let to a third party commercially
• Held as trading stock of a property development business
• Open to the public for 28 or more days a year
• A farmhouse occupied by a farmworker
• Owned by a registered provider of social housing
• Used by a trading business to provide accommodation to certain employees.
These reliefs are subject to detailed conditions and exclusions. Crucially, these are reliefs and must be claimed rather than automatically applying.
Failure to file an ATED return, even when no tax is due, will lead to late filing penalties as particular reliefs from the ATED charge must be claimed.
There is a Relief Declaration Return (RDR) which is a shorter version of the standard ATED return and can be used where no ATED is due. An RDR return can be used to make a claim for each type of relief and only one return is needed for that type of relief, i.e. if the company held two stately homes, all of which were opened to the public, then these two properties can all be reported on one return. However, if the company held a property that is open to the public as well as running a property development company, then two RDR returns would be required, one to claim each relief.
ATED and RDR returns must be made by 30 April if the property was held on 1 April or within 30 days of the property falling within the scheme if acquired after 1 April.
The penalties that arise on the late filing of an ATED return are as follows
• £100 initial penalty which will arise when the return is 1 day late.
• Daily penalties of £10 per day for a maximum of 90 days after the return is 3 months late.
• £300 or 5% of the tax liability arising (if higher) after the return is 6 months late.
• Further £300 or 5% of the tax liability arising (if higher) after the return is 12 months late.
Therefore, if your return is more than 12 months late, you are looking at potential late filing penalties of £1,600. This is without considering any late payment penalties or interest.
Furthermore, should the return be over 12 months late, HMRC can determine an additional penalty which is a behaviour-based penalty of up to 100% of the tax liability. The penalty will depend on whether the actions resulting in failure to file a return were deliberate or not and whether HMRC had to prompt a disclosure.
Late payment penalties and interest may also apply as well as penalties for inaccuracies within the returns.
If a company holds residential properties with valuations in excess of £500,000, then ATED returns or claims for relief may need to be filed. Should you need to get up to date with your ATED reporting and require assistance with making a disclosure to HMRC, our advisors will be happy to assist.
If you have any queries on stamp duty rates or property taxes in general then please get in touch. You may also enjoy reading our help and advice articles about UK property investment for non resident investors. You can also view more from our property tax advice services.