1. CHANGES TO THE TAXATION OF
RESIDENTIAL REAL ESTATE
Annual Tax on Enveloped Dwellings
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An overview of the ATED and detail on recent updates, with a
focus on property developers and letting businesses
Background
The Annual Tax on Enveloped Dwellings (ATED) was introduced as one of a three-pronged attack on wealthy individuals
holding UK residential property through corporate vehicles, which was perceived by both HMRC and the government to be a
form of tax abuse. Along with changes to stamp duty land tax (SDLT) (applicable on the acquisition of residential property) and
widening the applicability of capital gains tax (CGT) (on disposal of the same), the ATED was introduced as a means of taxing
the property during the period of ownership – therefore ensuring that corporate owner would be taxed on the full life cycle of
its holding.
When does the ATED apply?
The ATED is intended to apply whereby UK residential dwellings are owned and held by "non-natural persons" (NNP). The list
of NNPs generally covers most corporate owners, particularly UK and non-UK companies, but also partnerships with a
corporate partner and certain collective investments schemes. However ATED does not include the holding of UK residential
properties through trusts.
For the ATED charge to apply, the value of the residential property must exceed a certain amount. Originally, when the ATED
was introduced, this value was set at £2,000,000 (ordinarily being those acquired indirectly by non-UK resident individuals, to
benefit from inheritance tax and stamp tax planning opportunities). Please see figure 1 below for announced changes to this
threshold, as compared to the SDLT and the introduced "ATED-related" CGT.
Figure 1 – A comparison on the thresholds for SDLT, ATED and "ATED-related" CGT
Tax YearType of Tax
2014/15 2015/16 2016/17
Stamp Duty and Tax £500,000 £500,000 £500,000
Annual Tax on Enveloped Dwellings £2,000,000 £1,000,000 £500,000
ATED-Related Gains £2,000,000 £1,000,000 £500,000
Reliefs and Exemptions
The intention of the ATED is to catch arrangements involving NNPs and UK residential property in the 'private client' context.
However, given the wide drafting of the legislation, commercial arrangements could fall within the ATED charges, but for the
application of a relief or exemption.
Please refer to figure 2 for a non-exhaustive list of the more common reliefs and exemptions. Note, however, that the reliefs
are subject to a number of potential traps for the unwary. For example, in relation to property development, the property must
be held "exclusively for the purposes of developing and reselling the land in the course of trade". Whilst this will ordinarily be
true, even an incidental purpose (such as securing right to light to a neighbouring development site) could in principle
therefore restrict the availability of relief. More generally, use of the property by a 'non qualifying person' (broadly, individuals
connected with the business) will deny the availability of such reliefs. As such, it is advisable to obtain professional advice to
ensure that any relief is properly claimable.
There is also an important difference between a "relief" and an "exemption", which relates to compliance.
Figure 2 – A list of the more common reliefs and exemptions
Reliefs Exemptions
• Property rental business
• Property development business
• Property dealers
• Social housing
• Charitable companies (in certain circumstances only)
• Public bodies (as defined in the relevant legislation)
• Specific heritage bodies
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Compliance
The ATED is a self-assessment tax, and as such it is the obligation of the taxpayer to file a return with HMRC and pay the
requisite tax due. Both filing and payment need to be made within 30 days of the start of the relevant chargeable period – this
is, initially, the date that the property becomes chargeable, and thereafter 1 April of each subsequent year (meaning that a
return will be required at least once a year for as long as the chargeable property is owned, even where relief is available).
Where the property benefits from an exemption, this means that the property is not within the ATED charge and therefore no
return is required. This differs from a relief, whereby the property is notionally subject to charge but with the charge being
reduced in part or whole. Given that property developers and letting companies will likely be claiming relief rather than an
exemption, it is important that they are aware of the obligation to file annual returns.
Recent and impending changes
There have been two recent developments in relation to the ATED, which make the claiming of reliefs (and application of
exemptions) increasingly important.
First, it was announced that the ATED threshold is to be lowered, which will result in many more UK residential properties
being potentially subject to the charge. These charges, applicable from 1 April 2015 and 2016 respectively, are set out in
figure 3 below (the threshold for the 15% SDLT charge was reduced to £500,000 already).
Furthermore, it was announced in the 2014 Autumn Statement that the annual ATED charges would increase by 50% above
inflation (see figure 3). The annual charge is therefore now even more significant as an ongoing cost of ownership.
Having recognised that genuine property businesses will face compliance burdens in informing HMRC of their position each
year, the government has announced that the form of return will be simplified. Rather than filing a paper return in relation to
each ATED property owned (as was the system on inception), a new e-filing system known as a relief declaration return has
been announced. This should allow NNPs to file one return for all properties held, to the extent that the same relief is claimed
for each. For property developers and letting businesses, which will most likely be acquiring and holding all properties for that
sole purpose, this should allow for the filing of one universal return, greatly reducing administration (although the return will
need to be filed each year as before).
Figure 3 – ATED charges for 2013/14 to 2015/16 tax years
Annual ATED ChargeTaxable value of the property interest
2013/14 2014/15 2015/16 2016/17
Over £500,000 but not more than £1,000,000 N/A N/A N/A £3,500
More than £1,000,000 but not more than £2,000,000 N/A N/A £7,000 TBC
More than £2,000,000 but not more than £5,000,000 £15,000 £15,400 £23,350 TBC
More than £5,000,000 but not more than £10,000,000 £35,000 £35,900 £54,450 TBC
More than £10,000,000 but not more than £20,000,000 £70,000 £71,850 £109,050 TBC
Moe than £20,000,000 £140,000 £143,750 £218,200 TBC
How might this affect me?
Whilst the ATED was primarily designed to catch arrangements made by wealthy individuals as explained above, it may have
an adverse effect on genuine property rental and letting businesses, if sufficient care isn't taken.
The lowering of the ATED threshold from £2,000,000 (tax year 14/15) to £1,000,000 (from April 2015) to £500,000 (from April
2016) will be of particular relevance to these businesses. The threshold of £500,000 will mean it much more likely that more
properties of the sort acquired for development or letting purposes will fall into the ATED net, meaning such companies will be
obliged to file returns and claim reliefs (and check they are available to claim) in relation to increasing numbers of dwelling
units.
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For further information on any of the above, or for a discussion of how these changes might affect you, please
contact one of the members of the Addleshaw Goddard Commercial Tax Team below.
Peter Sayer
Partner
020 7880 5792
Christopher Connors
Associate
020 7160 3622
Elspeth Van Den Brande
Associate
020 7160 3158
