ATED: Things are looking up (but not in a good way!)

Lee Sharpe warns that rising property prices are not always good news for property companies. 

1 April 2022 is (was) an important date for the annual tax on enveloped dwellings (ATED); but it is only really now becoming relevant to companies that own high-value residential properties. 

ATED: Background 

The ATED regime commenced in April 2013, courtesy of FA 2013, Pt 3 (s 94 onwards), so it has been operating for a decade. If you thought the ‘E’ in ATED referred to ‘expensive’, I have bad news for you. When it was first introduced, it did indeed apply to ‘high-value’ dwellings worth more than £2m.  

However, the government liked it so much, it was not long (just three years, in fact) before the threshold was reduced to £500,000 (April 2016). 

ATED: Rates 

Readers will be delighted to know(!) that the government has recently published The Annual Tax on Enveloped Dwellings (Indexation of Annual Chargeable Amounts) Order 2023, which sets out the chargeable amount (the annual tax due) for chargeable periods beginning on or after 1 April 2023: 

It might seem strange that the charge itself increases to recognise inflation, but the threshold itself does not. 

Reasons not to panic 

1. ATED applies only to residential property in the UK held by ‘non-natural persons’ – basically companies, although it can apply to partnerships that include corporate partners and some collective investment schemes. 

2. Even then, ATED is triggered only if the company holds UK residential property where one or more individual dwellings exceed the £500,000 threshold. In other words, a £3m block of ten similar flats will not trigger an ATED charge, on the basis that each single dwelling (flat) will be worth around £300,000. 

3. And even then, if the dwelling is being used in a property rental or property development business, relief may be claimed (as recently confirmed in the 2023 Spring Budget, there are also special provisions where such property is being used under the ‘Homes for Ukraine’ Scheme, for the time being).  

The main reliefs include:  

• use by the company in a property rental business, being run on a commercial basis with a view of profit, including preparation to employ the property in a rental business (‘without undue delay’) and for sale after having so used the property; 
• use in a property development business or a property trading business; and 

• occupation by certain employees or business partners or use as a farmhouse. 

Reasons for some to maybe panic a little! 

1. The threshold is tested against the dwelling’s value rather than the price paid for the property (although the price paid will, of course, generally represent a property’s value when first acquired). 

2. There can sometimes be disagreement over what comprises a ‘single dwelling’.  

3. The reliefs contain one or two potentially quite nasty traps. 

The value of the dwelling 

Property revaluations are required every five years (1 April 2012, 1 April 2017, 1 April 2022, etc.) and apply to the next following five years or chargeable periods. Hence a dwelling’s value on 1 April 2022 will determine whether ATED is in point (and, if so, the scale of the charge as above) for the five years commencing 1 April 2023.  

Of course, property prices (values) have broadly risen over the last several years and, beyond the short term, look likely to continue to do so. So, dwellings that initially cost comfortably less than £500,000 when originally acquired several years ago may be exposed, sooner or later.  

Note also that the company’s corresponding ATED return will typically be due by 30 April 2023 (or 30 days from the commencement of the relevant chargeable period). Where a dwelling’s value is close to the threshold (or the edge of a band in the table above), the company may apply for a ‘pre-return banding check’ from HMRC.  

A single dwelling? 

Generally, it is not hard to identify a single dwelling, but note that a dwelling is defined not only as a property that is used as a dwelling but also as one that is suitable for use as a dwelling.  

Readers may be aware of a number of stamp duty land tax (SDLT) tribunal cases in the last few years, concerning claims that residential property transactions involved multiple dwellings and often where one of those ‘dwellings’ amounted to little more than an annexe to a main property. The taxpayer has not often been successful in such cases and Fiander and Anor v HMRC [2021] UKUT 0156 (TCC) usefully considers the technical aspects in the context of a claim to multiple dwellings relief for SDLT.  

Companies hoping to fall under an ATED threshold or band by splitting the value of a substantial property amongst more than one dwelling in a similar fashion may be disappointed. 

The standard reliefs 

• Based on the assumption that ATED is supposed to deter people from owning expensive homes through a corporate wrapper rather than just a nifty way for the government to raise additional taxes, the provisions to afford relief from ATED for companies actively engaged in letting or developing expensive dwellings would seem sensible enough. But there are potential traps. 
• The reliefs must be claimed annually (although the process is, thankfully, more streamlined now than it used to be).  
• Strictly, relief is tested throughout the chargeable period (generally the year 1 April to 31 March), and any day that does not qualify is chargeable. From a practical perspective, of course, it is unlikely that a property will be at risk of falling out of use in a property business or similar from one day to the next, but it seems HMRC takes a keen interest in unusually long periods of disuse. 

• Occupation of the dwelling by a ‘non-qualifying individual’ is particularly problematic. Not only does the duration of such occupation disqualify the property for relief from ATED, but it can even disqualify that entire chargeable period and the following three years or chargeable periods (so-called ‘look-back’ and ‘look-forward’ provisions) until the property is occupied by a ‘qualifying individual’. ‘Non-qualifying individuals’ are typically those connected with the company holding the property, extending to relatives and trust arrangements (FA 2013, s 136). Note that such disqualification can apply even if the arrangements are commercial or arm’s length (but relief may yet be available where the individual is an employee of the company or a business partner with a modest interest, as above). 

Conclusion 

Companies that own residential property are increasingly susceptible to liability under the ATED regime as property values rise – even for something as simple as failing to claim relief under the regime as a landlord operating on a commercial basis or similar. For example, HM Land Registry data suggests that the average house price in London has exceeded £500,000 since at least the beginning of 2022 (it was around £524,000 in April 2022). 

Companies also need to carefully monitor lettings or other occupation by individuals who may be connected with the company, even indirectly.  

HMRC is aware of taxing opportunities here, even if companies are not. For example, it wrote to a number of companies at the beginning of 2023, warning that it believed those companies had under-valued properties subject to ATED from as far back as April 2018.