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Corporate ownership of “expensive” dwellings

Special rules known as ATED (Annual Tax on Enveloped Dwellings) apply where an interest in a dwelling (typically a house or flat, whether freehold or leasehold) situated in the UK is owned or acquired by a company; by a partnership or LLP with at least one corporate member; or by a collective investment scheme.

For simplicity, this page refers throughout to “company”. Although described as applying to “expensive” properties, some of these rules can apply to properties worth as little as £500,000.

It does not matter whether the company owning it is resident in the UK or not, but commercial properties are not within the scope of the special rules. Nor are properties situated outside the UK. Nor do the new rules apply to trusts, even if the trustee of the trust is a company.

The special ATED rules are intended to create a positive disincentive to ownership of “expensive dwellings” by companies. Accordingly:

Where a residential property is not within the special ATED rules, capital gains on sale of the property may nevertheless be subject to UK tax under the normal rules applying to UK residents, or the extended charge applying to non-UK residents. We have further information about taxes on selling property.

Fuller details of the ATED charges are given below. These summaries are not exhaustive: if you need more information on your particular situation please contact us.

Stamp Duty Land Tax (SDLT)

SDLT is payable at the rate of 15% where a company acquires a dwelling costing more than £500,000. There is an exemption (so that only the normal, lower, rates of SDLT apply) for all genuine property businesses – covering (inter alia) property developers, investors and dealers.

There are conditions to qualify for relief, the most notable being that no-one connected with the company lives in the property. This relief is not automatic: it needs to be recorded and claimed on the relevant SDLT Return.

Annual Tax on Enveloped Dwellings (ATED)

An annual charge has applied from 1 April 2013 to each “expensive dwelling” owned by a company, initially to properties worth more than £2m.

The rate of tax depends on the property value at the relevant valuation date. From 1 April 2015 the charge was extended to properties worth between £1m and £2m and from 1 April 2016 the charge was further extended to properties worth between £500,000 and £1m.

The table below shows the rates from 1 April 2014.

Property Value £500,000-£1m £1m-£2m £2m-£5m £5m-£10m £10m-£20m >£20m
Annual charge 2014-15 £15,400 £35,900 £71,850 £143,750
Annual charge 2015-16 £7,000 £23,350 £54,450 £109,050 £218,200
Annual charge 2016-17 £3,500 £7,000 £23,350 £54,450 £109,050 £218,200
Annual charge 2017-18 £3,500 £7,050 £23,550 £54,950 £110,100 £220,350

 

The “property value” for this purpose was initially the value of the property as at 1 April 2012 or, if later, the date the property first enters the ATED regime. Properties are then revalued every 5 years and values for returns for 2018/19 on are based on the value at  1 April 2017.

Statutory reliefs from the ATED charge are substantially identical to those applying to SDLT: but they are not automatic, and must be claimed. A single return claiming exemption on a number of properties can be made, but must be made using HMRC’s Government Gateway from April 2017.

The ATED Return

  • The return year runs to 31 March, and returns must be submitted and tax paid by 30 April at the start (yes, we do mean the start!) of the year.
  • A separate return is needed for each property (with separate bands) liable to ATED. Thus a company with three “expensive dwellings” each worth £2.5m would have three annual charges of £15,400 each (not a single charge of £35,900 on the aggregate value of £7.5m).
  • Where a dwelling comes into charge during a year, a return must be made to pay the charge, usually within 30 days of acquisition.
  • An ATED return needs to be submitted by every taxpayer who owns UK residential property. If all properties owned by the taxpayer are exempt from the charge – for example because all are commercially let out – a single annual exemption return can be filled out in respect of all properties owned. A return would still be required if any property did give rise to an ATED charge.

Entering and leaving the ATED regime

  • Properties enter the regime on acquisition and must be valued at that time. Where the property is acquired under a normal commercial bargain, the price paid will normally be accepted as the value for ATED purposes.
  • The value of the property is self-assessed by the tax-payer, with the usual penalties that you would expect for any taxpayers significantly undervaluing the property. However, HMRC will offer the facility of a pre-return valuation where the self-assessed value is within 10% of one of the annual charge bands above.
  • Properties leave the regime on disposal.
  • New dwellings (including conversions) will normally enter the regime when council tax starts to apply.
  • Demolition: if a property is demolished with no intention to replace it, ATED ceases to apply when demolition commences. If the intention is to replace the property with another dwelling, ATED continues to apply during demolition and rebuilding and the property will be revalued when the new dwelling is complete.
  • Conversion to non-residential use – property will cease to be liable to ATED on the date the change of use is approved, or the last date of occupation, if later.

Disaggregation and multiple dwellings

  • Where the property consists of a number of self-contained dwellings (e.g. a number of flats), each dwelling will be valued separately.
  • There are anti-avoidance provisions to prevent disaggregation, i.e. breaking up the property and splitting ownership between connected parties.

HMRC has published detailed technical guidance on their interpretation of aspects of the ATED legislation.

Capital Gains Tax (CGT)

Where a company sells  a property in respect of which it has at any time been liable to the ATED charge, any gain is subject to UK Capital Gains Tax at 28%. There are rules to prevent the artificial dis-aggregation of the property, so as to bring the proceeds down below the ATED limit.

In the Autumn Budget 2017, as part of a proposals to extend the scope of UK Capital Gains Tax on non-residents from April 2019, the Government announced that the ATED CGT might be reformed or possibly abolished altogether.  Until April 2019, the AED CGT position is as explained below.

Helpfully, the ATED-related CGT charge on disposal applies only to the increase in the property’s capital value between 6 April 2013 (or the date on which the property first comes within the ATED regime) and the date of disposal – effectively rebasing the value at that date. As a result, we would recommend a professional valuation is obtained at that date for future reference.

Marginal relief

To avoid a “cliff edge” tax charge arising at the appropriate threshold (whether £2m or, for later years, £1m or £500,000) HMRC has introduced marginal tax relief to address this. This works by applying the 28% rate to the lower of the actual gain and 5/3 times the excess over the threshold – this is best illustrated by example:

  • Property with a cost of £1.1m is sold in tax year 2014/15 for £2.3m. This createsa gain of £1.2m.

The property was sold for £0.3m over £2m, so alternative computation is: 5/3 x £0.3m = £0.5m
As the alternative computation is less than the actual gain, the gain taxed at 28% is £0.5m.

  • Property with a cost of £1.6m is sold in tax year 2014/15 for £2.8m. This createsa gain of £1.2m.

The property was sold for £0.8m over £2m, so alternative computation is: 5/3 x £0.8m = £1.33m
As the alternative computation is more than the actual gain, the gain taxed at 28% is £1.2m.

What happens to losses on disposal?

  • Any losses incurred on the disposal of “expensive dwellings”, will be deductible only against subsequent gains on “expensive dwellings”.
  • Where an “expensive dwelling” is sold for less than the relevant threshold – the tax loss is limited to what it would have been, had the proceeds been the threshold amount.

Originally, the 28% CGT rate was to be applied only to non-resident companies. However, the final legislation applies it to UK-resident companies as well. This adds considerably to the complexity of the computations.

For example, if the property has not been subject to the ATED regime throughout its period of ownership, an appropriate apportionment is made and only the ATED-related part of the gain is charged at 28%, with the balance charged at normal Corporation Tax rates: ATED-related losses must be kept separate and are available only against ATED-related gains: any amount excluded from the ATED-related charge under the “cliff-edge” regime falls into the Corporation Tax charge: and any amount by which an ATED-related loss is restricted become a non-ATED related loss.

Inheritance Tax Planning

These changes  render much less attractive the strategy, commonly used hitherto by people of non-UK domicile, of effectively shifting the situs of the property for IHT purposes by owning it via a non-UK registered company. The straightforward alternative of simply insuring against the UK liability should not be lightly discarded.

The government has proposed changes to be applied from April 2017 whereby all UK residential properties will be within the scope of UK Inheritance Tax, regardless of whether they are owned by a UK person or through an offshore structure. The combination of the ATED regime and the Inheritance Tax changes means that in future it may less attractive to hold UK residential property for own occupation through a company.

We have further information on Inheritance Tax and the specialist advice we provide.

Now is the time to think ahead and plan strategically for these changes – so if they are set to impact you, or you know someone who will be affected, get in touch with us and we’ll do the rest.

For more information or help from one of our property tax specialists, please contact us using the enquiry form below.