Introduction

An interest in a single dwelling with a value of more than £500,000 and held by a company, a partnership whose members include a company, or a collective investment scheme (‘non-natural persons’) is subject to the annual tax on enveloped dwellings or ‘ATED’. 

ATED is charged for a chargeable period (1st April to the following 31st March) if the chargeable interest is held by the non-natural person on one or more days. However, the charge is pro-rated and only charged for the actual days in the period on which the owner is within the charge [FA 2013, s94].

What tax rates are charged for ATED?

Annual enveloped dwellings tax is charged according to the following rate table for 1 April 2023 to 31 March 2024:

Property value                                     Annual tax charge

More than £500,000 up to £1 million             £4,150

More than £1 million up to £2 million £8,450

More than £2 million up to £5 million £28,650

More than £5 million up to £10 million £67,050

More than £10 million up to £20 million £134,550

More than £20 million                           £269,450

The amount of these charges (but not the value bands) is increased yearly in line with the consumer price index. Properties must be revalued for ATED purposes every five years. For the 5 chargeable periods from 2023, the revaluation date is 1 April 2022. You must use that date to revalue the properties you owned on or before 1 April 2022. If you acquired property after 1 April 2022, use the acquisition date.

What is an enveloped dwelling?

Enveloped dwellings are beneficially owned by a company, a partnership whose members include a company, or a collective investment scheme except where the person entitled is a trustee of a settlement, personal representative or a beneficiary under a settlement.

What does enveloped dwellings mean? 

“Enveloped dwelling” means a dwelling held inside a company, a partnership whose members include a company, or a collective investment scheme. The point is that an enveloped dwelling can be sold by transferring the shares in the company holding the dwelling without the need to transfer it.

Why was annual tax on enveloped dwellings introduced?

The ATED was part of a package of measures which were intended to attack the holding of high value residential property in vehicles which allow either an interest in the property or the vehicle itself to be sold on free of SDLT (and usually stamp duty as well). Hence since 21 March 2012 there has been the 15% higher rate of SDLT on purchases involving “high-value residential transactions” involving non-natural persons. The holding of high-value residential property in vehicles is referred to pejoratively by HMRC as ‘enveloping’, but this term overlooks the many bona fide reasons why a property may be owned other than directly by an individual.

Do individuals pay ATED?

No, only companies, a partnership whose members include a company, or a collective investment scheme that own an interest beneficially in a single dwelling pay ATED.

What happens if you try to avoid annual tax on enveloped dwellings?

If HMRC becomes aware that you have failed to pay ATED they are likely to raise an assessment requiring you to pay the tax avoided with interest, and if you have been careless or you deliberately avoided paying the tax you will be charged a penalty.

Are there any annual tax on enveloped dwellings exemptions?

Yes, under FA 2013 ss132 to 155, annual tax on enveloped dwellings exemptions are available for:

• Property rental businesses
• Rental properties being sold, demolished or converted
• Dwellings opened to the public
• Property developers
• Property developers: exchange of dwellings
• Property traders
• Financial institutions
• Regulated home reversion plans
• Occupation by certain employees or partners
• Caretaker flats owned by flat management companies
• Farmhouses
• Social housing
• Charities
• Public bodies and bodies established for national purposes
• Dwellings conditionally exempt from IHT.

 You cannot claim relief if the property is occupied by a non-qualifying individual

When do you pay CGT on annual tax on enveloped dwellings?

Annual tax on enveloped dwellings capital gains should not be ignored. If you pay Annual Tax on Enveloped Dwellings, you must pay Capital Gains Tax when you sell the property up to 5 April 2019, or Corporation Tax from 6 April 2019. The CGT costs of taking the dwelling out of the company, also referred to as “de-enveloping” therefore need to be considered.

The extensions of the scope of CGT and corporation tax on gains in recent years open up the possibility of double taxation. The company may be subject to corporation tax on the increase in the value of the property from a base cost of 5 April 2015. An individual shareholder could face a CGT charge on the increase in the value of the shares from a base cost of 5 April 2019.

What are the ATED return filing dates?

You can use HMRC’s ATED online service to submit your return, appoint an agent and to pay anything you owe. Normally you need to submit your return:

• by 30 April if your property is within the scope of ATED on 1 April
• within 30 days of acquisition if your property comes within the scope of ATED after 1 April
• for a newly built property within 90 days of the earliest date:
  • your property becomes a dwelling for Council Tax purposes
  • it’s first occupied

You should only submit your return for each relevant chargeable period on or after 1 April.

Conclusion 

The ATED is a deceptively complex tax especially when it comes to deciding whether any of the numerous reliefs and exemptions actually apply. HMRC are adept at catching taxpayers out for either failing to notify them and pay the ATED or for claiming exemptions which do not apply.

Contact Patrick Cannon to discover his experience and how he may be able to assist you with ATED related issues.