Being that we use corporate structures to purchase and hold property titles it's essential for all our joint venture business partners to be aware of expenses associated with corporate ownership.
Special rules known as 'ATED - Annual Tax on Enveloped Dwellings' apply where an interest in a dwelling valued at more than £1,000,000 (typically a house or flat, whether freehold or leasehold) situated in the UK is owned or acquired by a company; by a partnership or LLP with at least one corporate member; or by a collective investment scheme. For simplicity this note refers throughout to “company”. Although described as applying to “expensive” properties, some of these rules can apply to properties worth as little as £500,000.
It does not matter whether the company owning it is resident in the UK or not: but commercial properties are not within the scope of the special rules; nor are properties situated outside the UK. Nor do the new rules apply to trusts, even if the trustee of the trust is a company.
The special ATED rules are intended to create a positive disincentive to ownership of “expensive dwellings” by companies. Accordingly:
Where a residential property is not within the special ATED rules, capital gains on sale of the property may nevertheless be subject to UK tax under the normal rules applying to UK residents, or the extended charge applying to non-UK residents.
Fuller details of the ATED charges are given below. These summaries are not exhaustive: if you need more information on your particular situation then we recommend you speak to a specialist property tax advisor as we're not qualified to give tax advice. Details of ATED can also be read on the HMRC website.
SDLT is payable at the rate of 15% where a company acquires a dwelling costing more than £500,000. If contracts were exchanged before 20 March 2014 transitional rules may operate to reduce the charge.
There is an exemption (so that only the normal, lower, rates of SDLT apply) for all genuine property businesses – covering (inter alia) property developers, investors and dealers. There are conditions to qualify for relief: the most notable being that no-one connected with the company lives in the property. This relief is not automatic – it needs to be recorded and claimed on the relevant SDLT Return.
Annual Tax on Enveloped Dwellings (ATED)
An annual charge has applied from 1 April 2013 to each “expensive dwelling” owned by a company. The rate of tax depends on the property value at the relevant valuation date. The table below shows the rates from 1 April 2014 and from 1 April 2015 (at which date the rates increase substantially and the charge is extended to properties worth between £1m and £2m). From 1 April 2016 the charge will be further extended to properties worth between £500,000 and £1m, with the annual charge for such properties provisionally set at £3,500.
Property Value | £1m-£2m | £2m-£5m | £5m-£10m | £10m-£20m | >£20m |
Annual charge 2014-15 | – | £15,400 | £35,900 | £71,850 | £143,750 |
Annual charge 2015-16 | £7,000 | £23,350 | £54,450 | £109,050 | £218,200 |
The “property value” for this purpose is the value of the property as at 1 April 2012 or, if later, the date the property first enters the ATED regime: properties will be revalued on 1 April 2017 and every five years thereafter.
Statutory reliefs from the ATED charge are substantially identical to those applying to SDLT: but they are not automatic, and must be claimed. At present a separate “nil return” must be made for each property for which exemption is claimed.
The ATED Return
Entering and leaving the ATED regime
Disaggregation and multiple dwellings
HMRC have published detailed technical guidance on their interpretation of aspects of the ATED legislation, which is available here.
From 6 April 2013, where a company sells for more than £2m a property in respect of which it has at any time been liable to the ATED charge, any gain is subject to UK Capital Gains Tax at 28%. There are rules to prevent the artificial dis-aggregation of the property so as to bring the proceeds down below £2m.
The reductions in the thresholds for the ATED charge in 2015 and 2016 will also apply to the enhanced CGT charge. Thus from 6 April 2015 the CGT charge will apply to properties sold for more than £1m which have at any time been within the ATED charge; and from 6 April 2016 to ATED properties sold for more than £500,000.
Helpfully, the ATED-related CGT charge on disposal applies only to the increase in the property’s capital value between 6 April 2013 (or the date on which the property first comes within the ATED regime) and the date of disposal – effectively rebasing the value at that date. As a result, we would recommend a professional valuation is obtained at that date for future reference.
Marginal relief
To avoid a ‘cliff edge’ tax charge arising at the appropriate threshold (whether £2m or, for later years, £1m or £500,000) HMRC have introduced marginal tax relief to address this. This works by applying the 28% rate to the lower of the actual gain and 5/3 times the excess over the threshold – this is best illustrated by example:
Property with a cost of £1.1m is sold in tax year 2014/15 for £2.3m. This creates a gain of £1.2m.
The property was sold for £0.3m over £2m, so alternative computation is: 5/3 x £0.3m = £0.5m
As the alternative computation is less than the actual gain, the gain taxed at 28% is £0.5m.
Property with a cost of £1.6m is sold in tax year 2014/15 for £2.8m. This creates a gain of £1.2m.
The property was sold for £0.8m over £2m, so alternative computation is: 5/3 x £0.8m = £1.33m
As the alternative computation is more than the actual gain, the gain taxed at 28% is £1.2m.
What happens to losses on disposal?
Originally, the 28% CGT rate was to be applied only to non-resident companies. However, the final legislation applies it to UK-resident companies as well. This adds considerably to the complexity of the computations – for example, if the property has not been subject to the ATED regime throughout its period of ownership an appropriate apportionment is made and only the ATED-related part of the gain is charged at 28%, with the balance charged at normal Corporation Tax rates: ATED-related losses must be kept separate and are available only against ATED-related gains: any amount excluded from the ATED-related charge under the “cliff-edge” regime falls into the Corporation Tax charge: and any amount by which an ATED-related loss is restricted become a non-ATED related loss.
Future Inheritance Tax Planning
These changes are likely to render much less attractive the strategy, commonly used hitherto by people of non-UK domicile, of effectively shifting the situs of the property for Inheritance Tax Planning purposes by owning it via a non-UK registered company. In future rather more sophisticated variations on the theme are likely to be needed.
Now is the time to think ahead and plan strategically for these changes – so if they are set to impact you, or you know someone who will be affected, contact your specialist property tax adviser or if you'd like obtain the details of our preferred advisor then please either get in touch via our contact us page or leave a message below, we'd love to help.
Thanks for reading,
Happy Investing.
The Estateducation Team.
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