The annual tax on enveloped dwellings (“ATED”) is a tax payable by companies that own UK residential property.
ATED, previously known as the Annual Residential Property Tax, came into effect from 1 April 2013 and is payable by UK and non-UK “Non-Natural Persons”. A Non-Natural Person is a company, a partnership of a corporate member or a collective investment scheme; it does not include trusts that hold an interest in UK residential properties valued at more than £500,000 on 1 April 2012 or an acquisition if later. The ATED charges payable range from £3,500 per annum from UK residential properties valued at between £500,000 and £1m up to £220,350 for UK properties with a value of more than £20m. These rates apply to the tax year 2017/2018.
ATED only applies to UK residential property and is part of a general package of taxes affecting UK residential property. These include 15% Stamp Duty Land Tax (“SDLT”) on the acquisition of such a property and Capital Gains Tax (“CGT”) at 28% on any gain on disposal after April 2013 even if it is held by a non-UK company.
There are a number of exceptions to the charges to ATED for example, those Non-Natural Persons i.e. mostly companies and partnerships who are involved in genuine business activities. Thus, properties which are commercial let even if they are residential, property development, properties open to the public at least 28 days a year on a commercial basis such as historic homes or conference venues, properties held for employee accommodation and properties held by charities for charitable purposes and farm houses are all excluded from ATED charges.
Where UK properties are owned by offshore companies, it was usually as part of an inheritance tax planning tool for non-UK domiciled individuals to keep UK residential property out of the UK inheritance tax net. A typical arrangement would be for a non-UK domiciled individual owning shares in an offshore company which in turn owns the UK property or more commonly the companies held in an offshore trust instead of the individual. There will be new rules coming into effect on 6 April 2017 which will remove these inheritance tax advantages for residential property held by a company or a trust.
Where UK residential properties are owned by offshore companies, the offshore company has two options: do nothing or de-envelope the property.
Taking no action i.e. keeping the offshore company as it is, means that if it is a residential property it will now incur inheritance tax for example, should the ultimate owner of the company die there will be a charge of 40%. If it is held by a trust, then a further inheritance tax charge of 6% will arise every 10 years and other charges will apply when assets are taken out of the trust e.g. paid to a beneficiary. It is therefore important for everyone and the companies to re-asses the tax position as applicable to them if you have UK residential property held by a company or through a trust. As mentioned above, Capital Gains Tax is also applicable on any gain made in respect of the residential property. Thus, for most residential properties which are valued at more than £500,000 and which are not commercially let, it is likely to be advantageous to de-envelope the property i.e. take it out of the offshore or UK company.
De-enveloping involves removing the UK residential property from the company’s ownership into personal ownership. This will mean that there will be no ATED but inheritance tax and Capital Gains Tax will apply in the usual way. If the property is occupied by the owner, then they may qualify for principal private residence exemption from Capital Gains Tax. However, on de-enveloping there may well be a charge to Capital Gains Tax from if any gain has been made from April 2013 to the date of de-enveloping.
Some advisors are suggesting offshore pension trusts rather than the more ordinary discretionary trust as better protection in view of the new rules. You do need to be aware of the consequences of putting any property into a pension particularly the limit on personal use and the limit on access to the capital which apply in the jurisdiction in question.