Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
Markel Tax

07 Jul 2020

ATED concerns caused by Covid-19

The Annual Tax on Enveloped Dwellings (ATED) regime introduced in 2013, is an anti-avoidance measure aimed at making it less attractive to hold high value UK residential property through a corporate structure.

It applies to a chargeable interest in UK residential property with a value of more than £500,000 owned or acquired by:

  • Companies;

  • Partnerships with a least one corporate member;

  • Collective investment schemes (including trusts).

There are a number of exclusions for certain property including residential accommodation for schools, members of the armed forces, care homes, hospices and hotels. There is also relief applied where the residential property is let commercially or used for trading purposes.

The current Covid-19 pandemic has affected many businesses including those that hold property. The ongoing uncertainty over tenants and property values has caused concerns both commercially but also from a tax perspective. A number of queries have been raised in particular on the impact Covid-19 may have on the exposure to the ATED charge. This article highlights some of the typical queries that have been raised along with responses.

What happens if the property falls below £500,000? Will the ATED paid for the period that it was below £500,000 be recoverable?

Unfortunately, the ATED charge does not qualify for a “split year” treatment.
A company’s liability to the ATED charge will depend on the value of the property at a valuation date, not the value during the year.

The valuation date for properties purchased before 1 April 2017 will be 1 April 2017, and for any purchased after 1 April 2017, the valuation date will be the date of acquisition.

A revaluation date occurs every five years so for those properties held on 1 April 2017, the next revaluation date will not be until 1 April 2022.

We have previously claimed ATED relief on the basis the property was rented out to a third party. However, due to covid-19 our tenant has been stuck abroad and unable to occupy the property. Are we still entitled to the relief?

The relief for property which is let commercially extends to property which, due to circumstances, is currently unoccupied.

HMRC technical guidance states that the relief available to property rental businesses is still available, even when the property “is not currently generating receipts from the business” but “steps are being taken to rent the property without delay.”

The examples given in the guidance are newly acquired property where a tenant has yet to be found or property where the previous occupier has left a new tenant has yet to be found. The crucial aspect is that the intention is to let the property. In this particular circumstance the property is still let to the same tenant but unoccupied, no different to a situation where the tenant had gone on holiday and the company would be unable to allow access to a new tenant. On the basis the company are still letting the property it would be unlikely that HMRC would challenge the validity of the claim for relief.

Our tenant has been out of work due to Covid-19 and therefore, we have offered them a rent free period. Would we still qualify for the property rental relief?

Similarly to the scenario discussed above, the property is still being let but not on a commercial basis.

If the rent free period was not offered, landlords could face having to evict the tenant and spend time and costs looking for another tenant.

Whilst the relief requires that the letting of property be conducted on a commercial basis with a view to profit, it would be hoped that HMRC would take into consideration the issues landlords have faced.

Our property no longer qualifies for an ATED relief and with the increase in our properties value, the charge is also increasing. Would it beneficial for me to take the property out of the company, sometimes referred to as de-enveloping?

De-enveloping is the process by which the ownership of a property is transferred from a company to an individual.

As individuals who hold property are not liable to pay ATED, de-enveloping can seem like an attractive option.

However, it is important to be aware of the tax implications which arise from undertaking a de-enveloping. Whether the property is sold to the individual or distributed in the form of a dividend in specie, there will be a disposal of the property by the company at market value, on which corporation tax, currently 19%, would be payable on any gain.

The individual acquiring the property would need funds to buy the property or suffer income tax on the distribution in specie. They would also be liable to stamp duty land tax which would include the additional 3% charge for residential property based on this market value.

The tax costs of de-enveloping would need to be weighed against the ongoing ATED charges to gauge what is the best option going forward.

We have been issued with an ATED late filing penalty which I don’t think is correct. What can I do?

Determined on a case by case basis, our tax investigations team have the expertise and experience to help potentially mitigate the penalty in full, or minimise your exposure to it. The article can be found here.

Our COVID-19 Hub contains a range of information and resources to best support our clients during this difficult time. To receive the latest news and insights by email sign-up here.

Tagged Tax for entrepreneurs and corporates
Next article in series

07 Jul 2020

HMRC Loses Corporation Tax Deductions Case in Court of Appeal