Understanding ATED with Ernst & Young

Annual Tax on Enveloped Dwellings (ATED)

Although it has existed since April 2013, ATED is a relatively unknown property related tax. We see this typically applying in client situations where a company owns expensive residential properties which are occupied or available for use by the shareholders or their relatives.

The tax was introduced to dissuade companies from purchasing expensive residential properties as purely speculative assets, rather than as buy-to-lets or as part of a property development trade.

Companies that own a “chargeable interest” in a residential dwelling (e.g. freehold, commonhold, leasehold, etc.) worth more than £500,000 are subject to the ATED regime. The amount due depends on:

1. The value of the dwelling

2. Whether the dwelling has been owned for the full chargeable period (which runs from 1 April to 31 March) or only part of the chargeable period

3. Whether they are entitled to full or partial tax relief

The amount of ATED due each year is given below. The amounts are pro-rated if the dwelling was not owned for the full chargeable period or if relief is available.

What matters most is the value ofthe property itself. A company that owns just 1% of a property worth £2.5m would owe the full £31,050, despite its share of the property only being worth £25,000. There are also valuation conditions which require affected properties to be valued every 5 years from April 2012 (April 2027 is the next valuation date).

As long as the dwelling is used for business purposes (e.g. a property rental business), full relief is usually available. Nonetheless, nil returns must still be filed with HMRC each year. The standard filing deadline is 30 days following the beginning of the chargeable period (i.e. by 30 April each year) or within 30 days of acquiring an interest in a dwelling. Penalties are due for late filings and interest is applied to late paid liabilities.

Although the overarching principles of ATED are relatively straightforward, in practice, there are plenty of pitfalls for the unwary, as illustrated in the examples below.

Due to the complexity of the ATED regime, the above is necessarily a high-level summary only. As always, independent tax advice should be sought were relevant.

While this article has focused on companies, it is worth pointing out that ATED applies to other entities as well, including partnership with a corporate partner, and collective investment schemes like unit trusts. Separate connection rules exist for these structures.