Due to rising property prices and an entry threshold stuck at £500,000, the annual tax on enveloped dwellings (ATED) is affecting more and more companies. In many cases, a relief applies to reduce or remove the tax liability. However, it can be difficult to establish if a relief is due and the costs of making a mistake can be significant. With the next compliance deadline of 30 April 2024 fast approaching, now is a good time to re-engage with ATED. 

Background

ATED was first announced by then Chancellor George Osborne at Budget 2012 as part of a package of measures intended to “tackle the ‘enveloping’ of high-value properties into companies to avoid paying a fair share of tax”. The other measures were the introduction of a 15% flat rate of stamp duty land tax (SDLT), which is still with us, and a 28% capital gains tax (CGT) charge on ATED-related gains, which was repealed by Finance Act 2019 as part of the extension of CGT to non-UK residents disposing of UK land. Following a period of consultation, ATED was enacted by Finance Act 2013. 

How ATED works

ATED is a tax on non-natural persons (mainly companies, but also partnerships with corporate members in some circumstances, and collective investment schemes) with interests in UK dwellings valued at more than £500,000. It is calculated and paid on an annual basis by reference to the chargeable period beginning on 1 April and ending on 31 March.

Some types of company are exempt from ATED, for example, charitable companies. In this regard, it is worth noting that the tax definition of ‘charity’ now requires that the body is subject to the jurisdiction of the UK courts in relation to charity law. Put simply, a non-UK charity that has previously relied on the exemption for charities will now be within the scope of ATED for the chargeable period beginning on 1 April 2024, and for subsequent chargeable periods. 

The chargeable amount in respect of a property for the chargeable period is determined by which band the property falls into based on its value on 1 April 2022, or on acquisition if later. The bands are set out below for the chargeable period beginning on 1 April 2024 and ending on 31 March 2025. 

The calculation can be more challenging where:

• the company moves in or out of ATED during the chargeable period (eg, where the property is acquired after 1 April). In this case, perhaps the easiest way to calculate the tax due is to divide the chargeable amount by the number of days in the chargeable period to give a daily amount, and to multiply the daily amount by the number of days for which the company is within the scope of ATED; and/or
• a relief from ATED (referred to here as an ATED relief) can be claimed. A day in the chargeable period for which a relief applies is treated as a day on which the company is not within the scope of ATED in performing the calculation above.

The deadline for filing a return and paying the tax for a chargeable period depends on whether the property was within ATED at the start of that period. If it was, the deadline is 30 April during the chargeable period; if it wasn’t, the deadline is 30 days from the date in the chargeable period on which it first came within the scope of ATED. The time limit is 90 days in limited circumstances, for example on the creation of a new dwelling. 

As ATED is calculated, reported and paid quite early in the chargeable period, the company may claim what is referred to as ‘interim relief’ when submitting or amending its return. In simple terms, it allows the company to benefit from an ATED relief at the time it submits its return, rather than having to wait until the end of the period; and it provides a mechanism for securing a repayment where circumstances change (eg, where an interest in a dwelling is sold before the end of the chargeable period). Interim relief must only reflect the facts at the date that the return is made or amended; it cannot be claimed based on anticipated future events. 

Key challenges

ATED is complicated and difficulties can arise in a number of areas, including: establishing if a property is a dwelling for these purposes (not all properties used for residential purposes are classed as dwellings); and determining the value on which the charge is based, in particular where the dwelling is in mixed use, where the property contains more than one dwelling, or where there is a change in circumstances. This means that mistakes can be made, especially if the person is new to, or unfamiliar with ATED. 

Some key points to bear in mind:

• ATED doesn’t just apply to mansions. When ATED was introduced it applied to properties valued at more than £2m. This was soon reduced to £1m and it has been £500,000 for some time now. Further, the property must be revalued every five years (the next revaluation date is 1 April 2027). The reduction in the set amount, combined with rising property prices, means that the average practitioner is now more likely to come into contact with ATED, even if no tax is payable as a relief applies.
  
  
• It shouldn’t be assumed that an ATED relief applies. The legislation provides for a number of ATED reliefs and, as you may expect, each relief depends on a number of conditions being met. Therefore, it’s important that entitlement to a relief is considered at the outset and is kept under review.
  
  This is particularly relevant in the case of the relief for a property rental business, which is by far the most used relief (see the statistics below). Key conditions include that the business is run on a commercial basis with a view to a profit and that a ‘non-qualifying person’ is not permitted to occupy the property. The definition of a ‘non-qualifying person’ is quite wide, starting with a person connected with the company and extending to that person’s spouse, civil partner and wider family. Further, complicated ‘look-forward and look-back’ rules apply with the effect that, where a non-qualifying person is permitted to occupy the property, relief for days preceding and succeeding the day of non-qualifying occupation may also be denied.
  
  
• Failing to meet ATED compliance obligations can be costly. As we’ve seen, the deadline for reporting and paying ATED is just 30 days from the start of the period (30 April 2024 for the chargeable period which began on 1 April 2024). This means that changes in circumstances must be monitored and amendments made where necessary. Late submission of a return or payment of a liability could attract penalties and interest, perhaps resulting in a significant bill for the company.
  
  It is also important to note that where a company’s ATED liability is reduced to £nil on claiming a relief, it still has ATED compliance obligations. A company in this position must submit a relief declaration return by 30 April during the chargeable period to avoid penalties. The statistics (see below) suggest that this is a burden placed on a growing number of companies, perhaps reflecting the trend in recent years to hold rental properties in a company following the introduction of restrictions on income tax relief for finance costs.  

Is ATED worth keeping?

Eleven years on from its introduction, ATED feels in need of a rethink. Given that it brings in a relatively small amount of revenue (£119m for 2021/22), is it worth the administrative burden placed on companies? Looking back at the original policy intention, the 15% flat rate of SDLT does most of the heavy lifting. Clearly, this is complicated by the fact that land and buildings transaction tax in Scotland and land transaction tax in Wales do not have an equivalent to the 15% flat rate of SDLT, but the figures suggest that ATED raises only a small amount of revenue from properties in Wales and Scotland. Perhaps it’s time to consider if ATED can be removed or replaced with a more targeted measure that acts as a deterrent to enveloping dwellings in a simpler way.

Stephen Relf, Technical Manager, Tax