Annual Tax on Enveloped Dwellings (ATED) is an annual tax payable mainly by companies that own UK residential property.
When ATED was introduced on 1 April 2013, the threshold amount was £2 million. The threshold has since been reduced, firstly to £1 million from 1 April 2015 and then to £500,000 from 1 April 2016.
In this blog, you will develop an understanding of the subject, get familiar with the technical terms, find out some examples, know more about how to use reliefs to minimise your liabilities and learn how to report and pay:
Meaning of ‘dwelling’
Your property is a dwelling if all or part of it is used, or could be used, as a residence, for example, a house or flat. It includes any gardens, grounds and buildings within them.
Some properties are not classed as dwellings. These include hotels, guest houses, boarding school accommodation, hospitals, student halls of residence, military accommodation, care homes and prisons
Meaning of ‘envelope’
Most residential properties (dwellings) are owned directly by individuals. But in some cases, a dwelling may be owned by a company (or other collective investment vehicle). In these circumstances, the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.
ATED will not apply where an individual alone, or with other individuals, owns a residential property.
Meaning of ‘Annual Tax’ on Enveloped Dwelling
The Annual Tax on Enveloped Dwellings (ATED) is a tax charged on ‘non-natural persons’ (a company, a partnership with a company member, or a collective investment scheme) which hold an interest in one or more UK residential dwelling(s) known as (a ‘single-dwelling interest’) and where the value of that single dwelling interest is above the relevant threshold.
Meaning of ‘single dwelling interest’
A ‘single-dwelling interest’ is a fundamental concept in ATED. It is a chargeable interest in land that consists of a ‘single dwelling’.
However, where a chargeable interest consists of two or more single dwellings, or one or more single dwellings and non-residential land, the single or each single dwelling is treated as a separate chargeable interest that is a single-dwelling interest.
Thus, if a property consists of a number of self-contained flats, each flat will usually be valued separately.
Meaning of Chargeable Interest
A chargeable interest means an estate, interest, right or power in or over land in the UK; or
the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power.
A chargeable interest does not include any security interest such as a mortgage); a licence to use or occupy land; or a tenancy at will (England, Wales and Northern Ireland only).
The UK is defined as England and Wales, Scotland and Northern Ireland. It does not include the Isle of Man or the Channel Islands. The UK also extends out to the 12-mile limit, so it would be reasonable to assume that Annual Tax on Enveloped Dwellings would also apply to dwellings on e.g. old forts in the Solent, or on islands within the 12-mile limit (unless covered in either case by a relief).
Chargeable interests in England and Wales and Northern Ireland include:
- A freehold
- A leasehold
- An undivided share of land
- A right in or over land
- A rent charge and the right to receive rent
- The benefit of a restrictive and a positive covenant
- An equitable interest in land such as a life interest or an interest in reversion or in remainder
- An executor’s or trustee’s power of appointment (over land).
Chargeable interests in Scotland include ownership of land, any other heritable right in or over land, the tenant’s interest under a lease of land, a servitude, and a life rent.
Meaning of ‘ownership condition’
The ‘ownership condition’ in the legislation refers to establishing if a company, a partnership (at least one of whose members is a company), or a collective investment scheme beneficially owns, wholly or partly, the interest.
References to a partnership also include a Limited Liability Partnership (LLP). Examples of ‘collective investment schemes’ are a unit trust and an open-ended investment company.
Beneficial ownership does not include where an interest is held in the capacity of a trustee, a personal representative or as a beneficiary under a settlement; the ownership condition is treated as not being met where the interest is held by a charitable company for qualifying charitable purposes; and none of the following is regarded as a company for these purposes:
- A public body
- The Historic Buildings and Monuments Commission for England
- The Trustees of the British Museum
- The Trustees of the National Heritage Memorial Fund
- The Trustees of the Natural History Museum.
Note that special deeming provisions apply to certain alternative property finance arrangements. Where these provisions apply, the legal effect of the arrangements is ignored for ATED and the lessee is treated as being beneficially entitled to the chargeable interest rather than the financial institution ( Ref: Finance Act 2013, s. 94(2)(b), (4)–(7), 95, 151–154 and 157).
Property Valuation basis
Taxpayers need to self-assess the value of the property and valuations must be on an open-market value basis (a willing buyer and a willing seller).
It will generally be the case that the actual purchase price should be able to be taken as providing the taxable value (for periods up to the first ‘valuation date’ following such acquisition).
In some cases, though, for example, where the purchaser and seller are connected, it may be that the purchase price is less than, or otherwise does not represent the open market value. In such instances, the open market value of the interest must be used to calculate the ATED charge.
Important notes on Dwelling valuation
Note that the taxable value of a dwelling that is conditionally exempt from inheritance tax (IHT) is taken to be zero in some circumstances. A taxpayer may ask HMRC for a ‘Pre-Return Banding Check’.
If HMRC challenges a valuation and it is determined that it is wrong, the person responsible for paying ATED may, clearly, have to pay penalties, as well as the increased ATED payable plus interest for late payment.
Common Situation Examples
HMRC provides some examples of common situations for a quick understanding of how ATED impacts on certain situations. Please note the example below are for illustrative purposes only, and the effect of the legislation in individual cases may vary:
Mr Z owns the beneficial interest in a dwelling worth £4 million. As Mr Z does not meet the ownership condition he is outside the scope of ATED and is under no obligation to (and should not) send in returns.
B Ltd is acting as a bare trustee for Mr Y and it holds the legal title to a dwelling worth £15 million. The beneficial interest in the dwelling is held by Mr Y personally. Despite B Ltd owning the legal title to the dwelling it does not own the beneficial interest. B Ltd does not, therefore, meet the ownership condition and is under no obligation to (and should not) send in returns.
C Ltd and D Ltd are trustees of a settlement trust (for example a discretionary trust). A dwelling worth £25 million was settled into the trust. Whilst C Ltd and D Ltd hold the beneficial interest in the property as trustees they are not under an obligation to (and should not) send in returns.
This is because trustees holding the interest in their capacity as trustees of a settlement are outside the ownership condition rules.
E Ltd owns the beneficial interest in a dwelling worth £6 million. It meets the ownership condition as it is beneficially entitled to the single dwelling interest. The dwelling is worth more than £500,000 at the latest valuation date. It does not meet any of the conditions for the exemptions to apply.
However, it does meet the conditions for one of the reliefs. E Ltd will not have a liability to pay ATED so long as it continues to meet the relief conditions but it will be under an obligation to (and must) send in returns to claim the relevant relief.
F Ltd owns the beneficial interest in a dwelling worth £7 million. It will be in the scope of the tax for the reasons set out in example four above.
However, in this case, it cannot claim relief as it has permitted a non-qualifying individual (see paragraph 33 of this guidance) to occupy the dwelling. F Ltd is under an obligation to make ATED returns and it will also have an ATED liability to pay.
G Ltd owns the beneficial interest in a dwelling worth £3 million. Its issued share capital is owned by Mr W and Mr X who own the shares as trustees of a settlement trust. The dwelling is occupied by Ms V, a beneficiary of the trust.
Even though the shares are owned by the trustees of a settlement (persons outside the scope of the tax) G Ltd owns the interest and therefore it meets the ownership condition. G Ltd must therefore make returns and as the dwelling is occupied by a non-qualifying individual must also pay ATED.
Note: Further information on the legislation relating to ATED can be found in sections 94 to 174 Finance Act 2013 (including Schedules 33, 34 and 35 of that Act).
Calculated amounts in the examples are for illustration purposes and may be different depending on taxpayers’ individual circumstances and due to the indexation of the initial amounts set in FA 2013. Similarly, any revaluation in 2017 or later years is not a part of the examples.
How Can Heighten Accountants Help with ATED
Complying with HMRC regulations for UK Annual Tax on Enveloped Dwellings (ATED) can be a complex process and it is crucial to ensure that you sort help from professionals who understand ATED filing, the ATED bands, the relevant deadlines, and the available reliefs, and the steps to minimise your tax liability and avoid penalties.
- Initial Assessment and Consultancy on AETD
- Advice on the applicable AETD tax bands
- Assessing and claiming ATED reliefs
- Reminding you of AETD filing deadlines
- Assisting in the preparation and submission of the necessary tax forms
Our expertise can ensure that your ATED filing is accurate and timely, minimise your tax liability and avoid costly penalties.
Contact us by filling out the form below now and get complete information related your ATED queries from our experts:
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Annual Tax on Enveloped Dwellings (ATED) FAQs
As ATED is an annual tax, any reliefs available must be claimed based on ‘relievable days’ which are days where the conditions for the relief are met. Reliefs are available where the property is:
- Let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner;
- Open to the public for at least 28 days per annum;
- Part of a property trading business and is not, at any time, occupied (or available for occupation) by anyone connected with the owner;
- Part of a property developer’s trade where the dwelling is acquired or held with the intention to develop and sell on and is not, at any time, occupied (or available for occupation) by anyone connected with the owner;
- For the use of certain employees of the company or partners;
- A farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner;
- A dwelling acquired by a financial institution in the course of lending;
- A caretaker flat owned by a management company;
- Owned by a regulated home reversion plan provider;
- Owned by a provider of social housing.
Reliefs must be claimed in an ATED return or in a relief-declaration return. The interest is within ATED. An ATED return must be filed, and any tax due paid, within 30 days of the date of acquisition of the interest. Reliefs are available to reduce/extinguish the amount of the charge.
The Annual Tax amount due is calculated in accordance with the following by reference to the taxable value of the interest. The rates below apply for the year to 31 March 2023:
- Property value from £500,001 to £1,000,000: annual charge of £3,800;
- Property value from £1,000,001 to £2,000,000: annual charge of £7,700;
- Property value from £2,000,001 to £5,000,000: annual charge of £26,050;
- Property value from £5,000,001 to £10,000,000: annual charge of £60,900;
- Property value from £10,000,001 to £20,000,000: annual charge of £122,250;
- Property value above £20,000,000: annual charge of £244,750
A company acquires a residential property on 1 May 2022 for £700,000. The annual charge for 2022–23 is £3,800 x (336/366) = £3,488.
Here are the minimum steps you are required to take to ensure that your ATED return is filed correctly and on time:
Step 1: ATED Registration
Step 2: Determining the Value of the Property.
Step 3: Calculating the Tax you may owe
Step 4: Filing your ATED Return
Step 5: Paying any Tax you may owe
It is important to ensure that you file your return and pay any tax owed by the deadline to avoid penalties and interest charges. The deadline for filing and payment is April 30 of the relevant tax year, so for the 2024-25 tax year, the deadline is April 30, 2024.
The ‘chargeable person’ is the person liable to make returns and pay ATED. A person is liable:
- Where a company meets the ownership condition, the company
- Where a partnership meets the ownership condition, the responsible partners
- Where a unit trust scheme meets the ownership condition, the trustee of the scheme
- Where an open-ended investment company meets the ownership condition, the body corporate referred to in section 236(2) of the Financial Services and Markets Act 2000
- Where an EEA UCITS meets the ownership condition which is not an open-ended investment company or unit trust scheme, the management company for that UCITS, or
- In any other case, the person who has day-to-day control over the management of the property subject to the scheme
The responsible partners’ means all the persons who are members of the partnership concerned on the first day in the chargeable period on which the partnership meets the ownership condition. These partners are jointly and severally liable to pay the tax.
Property Rental Businesses Relief is available from ATED where a single-dwelling interest is exploited as a source of rent or other receipts in the course of a qualifying property rental business.
In order for the relief to be claimable the person making the claim must be carrying on a qualifying property rental business. Such a business must meet two conditions to be a property rental business:
- The business must be a property rental business
- It must be carried on a commercial basis and with a view to a profit