The annual tax on enveloped dwellings (ATED) is an annual charge that may be imposed on non-natural persons (including companies) that own UK residential property valued in excess of £500k per individual dwelling.

Companies carrying on a buy-to-let business could fall within the rules. Other entities may also fall within the charge, including partnerships with a corporate partner and collective investment schemes, and the term ‘company’ is used here to refer to any such entity. This article briefly discusses the main ATED principles, potential reliefs and other practical requirements.

The current ATED charges range from £3,500 per year per dwelling valued between £500k and £1m, through to, ultimately, £220,350 per dwelling worth more than £20m. Other bandings and annual fees apply between these ranges. The charge payable is calculated by reference to the number of days within a chargeable period (1 April to 31 March) that the property concerned falls within the regime.

What is the purpose of ATED?

ATED was introduced as part of a general attack on corporate vehicles holding residential property. Other changes introduced to counter this issue include a higher rate of stamp duty land tax (15%) when a company acquires a dwelling for £500k or more (subject to reliefs) and a charge to capital gains tax on the disposal of a dwelling within ATED (although limited to gains arising from 6 April 2013).

What is a dwelling?

A property is treated as a ‘dwelling’ for the purposes of ATED if it is used or suitable for use as a single dwelling or it is in the process of being constructed or adapted for such use. Dwellings situated in the grounds or garden of the main house may, depending on the facts, be treated as part of that main house and, hence, the two properties could be considered to be a single dwelling for ATED purposes.

How is the valuation of a dwelling determined?

A dwelling is only potentially within the scope of ATED if it has a value of more than £500k. Valuations are, therefore, a key part of the ATED regime.

The value taken into account for ATED purposes is the market value of the dwelling on the most recent valuation date. The most recent valuation date is 1 April 2017 with revaluations taking place every five years after that. The substantial acquisition or disposal of an interest in a dwelling will also mark a valuation date.

Taxpayers can request HMRC to determine whether or not a property falls within the scope of ATED or, indeed, to determine which band the property falls within. However, this is only available if there is no relief available to reduce the ATED liability to zero and where the tax payer's own valuation is within 10% of a threshold.

Reliefs and exemptions from ATED

There are a number of reliefs that may be available to reduce the ATED liability. The reliefs must be claimed in the annual ATED return and only apply for each day in a chargeable period when the conditions are met. The main reliefs are often relied upon are those for property rental, dealing and development businesses. There are also reliefs for farmhouses, properties used for employees' occupation and dwellings open to the general public. New reliefs were introduced from 1 April 2016. These cover properties purchased for the purpose of a trade run on a commercial basis and with a view to profit, properties held for the purposes of an equity release scheme and the occupation of a dwelling by a caretaker in, for example, a block of flats. Care is needed when reviewing the availability of any relief as there are restrictions that limit their scope.

Practical points

  • ATED returns are due within 30 days of the first day in which the entity is within the regime even if no tax is payable due to a relief. This may require a return shortly after acquiring a property. A relief must be claimed in a return.
  • Separate returns are required for each separate dwelling, although a single return may be used if the same relief applies to all dwellings.
  • If a dwelling is within ATED it may be possible to restructure the arrangements so that it falls outside the charge. We would strongly suggest seeking professional advice before embarking on any reorganisation to avoid unforeseen consequences, such as inheritance tax, stamp duty land tax and corporation tax (or equivalent) charges.
  • ATED should, of course, be considered prior to the acquisition of any property. Reliefs may be available to mitigate the potential costs; however it is far easier to consider the position prior to acquisition.
  • The most recent revaluation date was 1 April 2017 and such valuations will be used for ATED purposes from 1 April 2018. Companies holding residential property may need to start considering obtaining a valuation during 2017 so that they are aware of their position prior to April 2018.