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Article:

ATED – taxing UK residential property

11 February 2016

Developers and investors

The annual tax on enveloped dwellings is a tax on certain entities holding high-value residential property although, provided conditions are met, tax reliefs may be claimed. The entry threshold reduces to £500,000 from 1 April 2016.

Outline

The annual tax on enveloped dwellings (ATED) applies an annual tax charge based on the value of residential property owned by companies, partnerships with a corporate member, and collective investment schemes. Some exemptions and certain reliefs are available but onerous filing requirements are imposed and, potentially, ATED-related gains can arise on the disposal of the property if it is retained as an investment. The ATED annual charges are:

Property value1 Annual charge following FA 2015
£500,001 - £1m2 £3,500
£1,000,001- £2m £7,000
£2,000,001 - £5m £23,350
£5,000,001 - £10m £54,450
£10,000,001 - £20m £109,050
Over £20m £218,200

1 At 1 April 2012 or on date of later acquisition (revalued every five years)
2 From 1 April 2016

Construction of new residential properties

If a site is acquired with no properties suitable for residential use (or being adapted for such use) in existence on it, the site is outside the scope of ATED even if acquired with planning permission for the construction of new residential properties. When new residential properties are constructed on a site, they are treated as coming into existence for ATED when they are ‘completed’. This is the day on which the local authority deems them to come into existence for council tax unless, exceptionally, they are occupied on an earlier date. The date specified in the Completion Notice issued by the local authority is the valuation date for ATED purposes (unless occupation starts earlier).

The ATED rules contain a number of potential traps for developers, including where existing residential properties are converted or redeveloped. For example, where a residential property is demolished and replaced with new residential properties, ATED applies on the basis that the old residential property ceases to exist, and the new residential properties come into existence, only on completion of the redevelopment. Therefore, an ATED return may still be required after the old property has been demolished, even though no new building exists on the site at that time.

Taxable value

To avoid properties moving in and out of ATED bands as their market value rises or falls, values are, broadly speaking, fixed until 1 April 2017. In the absence of any other relevant event, the value of a property is treated as being that as at 1 April 2012: changes in the actual market value of the relevant property are ignored. 

However, a valuation date (or a revaluation date) may be deemed to occur when there is a substantial disposal of part (but not the whole) of an interest in the property. For example, if a residential property was valued at £4 million on 1 April 2012 (the first fixed valuation date) and the owner disposed of an interest in part of the gardens it occupies for £100,000 on 
1 October 2015, a revaluation is required.  The new value would be the market value of the owner’s reduced interest on the date of the land disposal (ie not simply £4 million less £100,000). So the reduced interest could have a market value on 1 October 2015 of more than £4 million and could move the dwelling to a higher ATED band. 

Reliefs 

Property developers can claim relief from ATED where a residential property is held to carry on a property development trade and the interest in the property is held exclusively for the purpose of development and resale. Developers may also be able to claim relief when they acquire a residential property as part of a ‘qualifying exchange’ in return for the transfer of a newly constructed (and not previously occupied) residential property to the vendor. 
Relief from ATED may be claimed where a residential property is let by a qualifying property rental business (or steps are being taken to ensure that the property will be let without undue delay). To qualify, the rental business must be run on a commercial basis with a view to profit. HMRC says that a range of factors that may suggest that a property rental business is not run on a commercial basis, including where the business is funded by debt at a level or on terms (eg rates of interest) not available from a third party lender. A further relief may be available where an empty but previously let residential property is being prepared for sale, as long as steps are taken so that it can be sold without undue delay.

However, for both developers and investors, the relief is not available if a ‘non-qualifying’ individual (for example, an individual connected with the entity which holds a chargeable interest in the residential property) is permitted to occupy the property.

Compliance administration  

If a property is within the scope of ATED then, regardless of any reliefs that may apply, ATED returns must be submitted. Penalties are charged for non-compliance. 

For a newly constructed residential property liable to ATED, the filing date is 90 days from the date of completion and, thereafter, 30 April in each year the chargeable interest in the property continues to be held. However, for a newly acquired residential property liable to ATED, the filing date is 30 days from the date of acquisition and, thereafter, 30 April in each year the chargeable interest in the property continues to be held. In both cases, transitional rules apply for the chargeable period 1 April 2015 to 31 March 2016 for properties within the £1m-£2m band.  

Where relief can be claimed in respect of a newly constructed or acquired residential property and there is no liability to ATED, a relief declaration return (RDR) must be submitted instead of an ATED return. The first annual RDRs were due by 1 October 2015 and, for subsequent periods, annual returns will be due on 30 April each year. While the RDR can be made in respect of multiple residential properties, a separate RDR submission will need to be made in respect of each type of relief being claimed and the return must specify which relief it relates to.
Where a residential property is newly constructed or acquired and an RDR has previously been submitted, the existing return will suffice provided the same relief is claimed. However, if the property is eligible for a different type of relief not previously claimed, the filing date for the current chargeable period is the later of 1 October 2015 and 90 days from the date of ‘completion’ (or 30 days from the date of acquisition). 

Potential issues for developers

A building may continue to be within the scope of ATED even when it is unsuitable for occupation as a dwelling. 

Example: A Ltd has obtained planning permission for major alterations to be made to its residential property, including the addition of a new basement and a three storey extension. Despite the fact that the property will not be suitable for occupation for a period of 12 months while the work is being carried on, it continues to be a dwelling for the purposes of ATED for that period.

Potential issues for investors

Property investors may be caught out where they carry out fitting out works before completion of the acquisition of a residential property.

Example: A Ltd has contracted to purchase a flat in a different development and has paid a 10% deposit on exchange in the normal way.  However, before completion of the contract A Ltd enters onto the property to install a kitchen and bathrooms to its own exacting specifications.  The act of taking possession of the uncompleted residential property temporarily under licence for fit out purposes could bring forward the point at which the flat comes within the charge to ATED. 

Your next steps

Our ATED specialists can advise you on the availability of reliefs and prepare or review ATED returns. If you would like advice on ATED or any other property tax issues please contact Hira Sharma.