Self assessment day for ‘enveloped’ £2m+ residential properties approaching

The 1st of October is self assessment day for ‘enveloped’ £2m+ residential properties. As the Finance Bill passes into law as Finance Act 2013 its first effect will be felt by people who have chosen to put high value residential property into corporate-based vehicles or ‘envelopes’.

The effects of the measure will not only be felt by those who sought to save Stamp Duty Land Tax (SDLT). The measure may affect companies and other ‘non-natural persons’ that own residential property, such as companies which develop, let or trade in high value residential UK property.

The tax will almost invariably be paid by companies. Affected companies that own high value properties will be liable for the tax unless they are eligible for one of the reliefs. However, the relief is not automatic: claims have to be made on the special ATED returns. Failure to make a return, or even simply submitting a return late, will incur penalties, whether there is tax to pay or not.

Who has to pay the ATED?

The new tax grew out of attempts to counter SDLT avoidance by individuals “enveloping” high value properties in companies whose shares are only subject to Stamp Duty at 0.5%, whereas the normal top rate of SDLT that an individual pays is now 7% (a special rate of 15% applies to transfers of high value residential property to non-natural persons). But the scope of the new tax goes beyond such special purpose vehicles. There is nothing in the rules that restricts them to any sort of tax avoidance arrangements: if a company owns high value residential property it will have to pay ATED unless it claims one of the reliefs.

It  may also catch other sorts of situations including trading and property companies that own residential property (say a company flat) which is used by a shareholder with more than a 5% stake in the company.

The three types of entity that may have to pay ATED are:

  • companies;
  • partnerships with corporate members; and
  • collective investment vehicles 

if they own high value residential UK property.

It is the property-holding entity that is primarily responsible for making returns and paying the tax. However, if a return is not filed or the tax not paid individuals connected with the company may be made liable for it. 

What are high value residential properties?

High value residential properties are dwellings individually valued at more than £2m (as at 1 April 2012) and located in the UK. Dwellings are not aggregated but taxed individually. So for example someone who, through a company, owns  a £1.4m flat in London and a £1.5m holiday home on a Scottish island will not be bothered by ATED but a company that owns a single property worth £2.1m will have tax to pay unless it qualifies for one of the reliefs outlined below.

Relief for certain companies

Subject to the detailed conditions being met, relief is available for:

  • farmhouses;
  • property development, rental and trading businesses;
  • employee accommodation;
  • properties that are opened to the public;
  • charities; and
  • certain diplomatic or publicly owned properties.

None of those reliefs is automatic: all must be claimed.

There are also restrictive conditions on some of the reliefs, in particular those for property businesses and employee accommodation. For example, a company that makes a high value dwelling available to a shareholder who (with their family) also has a 30% stake in the company will not benefit from the relief. The same rule can apply to a partnership which has a corporate partner in which an individual partner who has a 30% stake in the partnership has a high value dwelling provided.

It is too late to make any arrangement to change ownership of a property and so avoid ATED, so any returns must be made for 2013/14.

Relief for farmhouses

HMRC’s promised specific additional guidance for farmhouses did not appear “before July 2013” as promised but that does not mean that farming companies and partnerships do not need to take action. The relief for farmhouses will be more generous than others because it will allow “connected persons” to have the use of the dwelling without losing the company the benefit of the relief. However, even in this case a return will still have to be made to claim the relief and the property will have to be occupied by a “qualifying farm worker”.

Returns for properties acquired after 6 April 2013

1 October 2013 is the deadline for filing returns for dwellings owned on 1 April 2013 but returns are also required for high value residential UK properties acquired since then. 1 October 2013 is the earliest possible return filing date but there are two other possible deadlines:

  • for existing properties bought second hand the return deadline will be 30 days from acquisition; and
  • for newly built properties that require valuation, 90 days from acquisition.

These filing dates apply if they fall later than 1 October 2013.

ATED isn’t the only tax

If a company has to pay ATED it also becomes liable for CGT on gains on disposals of residential property to which ATED applies. This exposes the company to a tax rate of 28% instead of its corporation tax rate which may be as low as 20%. Furthermore, the CGT relief for only or main residences does not apply to ATED-related gains.

Therefore, as well as preparing to file returns for 2013/14 companies, partnerships and collective investment vehicles that are affected by ATED need to consider the long-term effects of this new tax and consider their options for “de-enveloping”. That isn’t a simple decision as de-enveloping may mean triggering tax charges on gains that accrued up to 31 March 2013 as well as the costs of transferring the property.

The situation is complex and potentially costly and should not be ignored.

For advice contact

Chris Williams Senior Manager, National Tax, Mazars LLP

Rosemary Blundell, National Tax Director, Mazars LLP