Annual Tax on Enveloped Dwellings (ATED) – Definition, Overview & FAQ
What is an annual tax on enveloped dwellings (ATED)?
Definition: The Annual Tax on Enveloped Dwellings (ATED) is a UK tax that applies to residential properties owned by certain non-natural persons (NNPs).
These NNPs typically include companies, partnerships with corporate partners, and collective investment schemes. ATED is targeted at properties that are not occupied by the owner or used for business purposes, but are instead ‘enveloped’ within corporate structures.
Key points about ATED are:
- Property Value Threshold: ATED only applies to residential properties valued above a certain threshold, which is periodically reviewed and adjusted by the UK government.
- Annual Charge: The tax is payable annually, with the amount based on the property’s value, falling into set valuation bands.
- Filing Requirements: Eligible property owners must file ATED returns annually, even if they are claiming relief and owe no tax.
- Reliefs and Exemptions: There are various reliefs available that can reduce or eliminate the ATED charge, such as for properties rented on a commercial basis to third parties, properties open to the public, and properties being developed for resale.
- Penalties for Non-Compliance: Failing to file or incorrectly filing an ATED return can result in penalties and interest charges.
ATED was introduced as a measure to discourage the use of corporate structures to avoid or reduce property taxes, particularly in the context of high-value residential properties. It ensures that these properties contribute a fair share of tax, even when owned by corporate entities.
What is a dwelling?
In the context of real estate and law, particularly in the UK, a dwelling is a place where someone lives.
It refers to a residential accommodation that typically includes features necessary for living comfortably, such as sleeping areas, a kitchen, and bathroom facilities.
The term can encompass various types of living spaces, including:
- Houses: Individual structures typically housing a single family.
- Flats or Apartments: Separate living spaces within a larger building.
- Bungalows: Single-story houses.
- Mobile Homes: Residences designed to be movable.
- Converted Spaces: Buildings that have been converted into living spaces, such as lofts or barn conversions.
The defining feature of a dwelling is its suitability for residential use, regardless of its size, form, or whether it’s a permanent or temporary structure.
In legal and tax contexts, the definition of a dwelling can have implications for zoning, property taxes, and eligibility for various housing-related benefits or regulations.
What is an enveloped dwelling?
An enveloped dwelling refers to a residential property that is owned not directly by an individual, but ‘enveloped’ within a corporate structure. This means the property is held by a company, a partnership with a corporate member, or a collective investment scheme.
In the context of UK taxation, specifically regarding the Annual Tax on Enveloped Dwellings (ATED), this concept is important. It targets high-value residential properties owned through these corporate vehicles, primarily to discourage the practice of using corporate ownership as a means of tax avoidance.
The term “enveloped” signifies that the property is wrapped within another legal entity, rather than owned by an individual. This can have taxation implications, as these properties fall under the ATED regime if they meet certain value thresholds. It’s a measure to ensure these properties contribute their fair share to the public coffers, regardless of the corporate structures used to hold them.
What is the ATED charge?
The Annual Tax on Enveloped Dwellings (ATED) charge is a UK tax that applies to residential properties held by non-natural persons (NNPs). It’s specifically targeted at high-value residential properties owned through corporate structures.
Key aspects of the ATED charge include:
- Valuation Bands: The amount of ATED payable depends on the value of the property, with different rates applicable to different valuation bands. These bands and rates are set by the UK government and can be updated periodically.
- Annual Levy: It’s an annual charge, and property owners liable for ATED must file a return and pay the tax each year.
- Eligibility: The charge generally applies to residential properties in the UK valued above a certain threshold, which is reviewed and can change over time.
- Reliefs and Exemptions: There are several reliefs and exemptions that can reduce or eliminate the ATED charge, depending on how the property is used. For example, properties rented to third parties on a commercial basis or those being developed for resale may qualify for relief.
- Penalties for Non-Compliance: Failing to file an ATED return or incorrectly filing can result in penalties and interest on unpaid tax.
The ATED charge was introduced as a measure against tax avoidance, particularly in cases where high-value residential properties are ‘enveloped’ in corporate structures to reduce or avoid property taxes. Owners of such properties must assess their liability for ATED and ensure compliance with the relevant filing and payment requirements.
ATED Reliefs and excluded dwellings
Under the Annual Tax on Enveloped Dwellings (ATED) in the UK, there are several reliefs and exclusions that can reduce or eliminate the tax liability for certain types of enveloped dwellings. These reliefs are designed to prevent the ATED from impacting certain types of property usage that are not aimed at tax avoidance.
It’s crucial for property owners to claim these reliefs actively; they are not granted automatically.
- Property Rental to Third Parties: If a property is rented on a commercial basis to people who are not connected with the owner.
- Property Developers: Relief is available for developers who hold property as part of their business for resale.
- Property Traders: If the property is held in a property trading business and not for the benefit of the owners or connected persons.
- Financial Institutions: Relief for properties owned by financial institutions as part of their business of lending money.
- Farmhouses: Specific conditions apply, mainly relating to the scale of farming operations.
- Charitable Use: Properties held by charities and used for charitable purposes.
Certain properties are completely excluded from ATED, including:
- Hotels, Guest Houses, and Boarding School Accommodations: Commercial establishments that offer temporary lodging.
- Hospitals and Care Homes: These properties are used for healthcare and are not subject to ATED.
- Prisons and Military Establishments: Institutional properties used for public service purposes.
- Student Accommodations: Specifically designed or adapted for and used by students.
It’s essential for owners of high-value residential properties held by companies or similar entities to assess their ATED liability annually and claim any applicable reliefs. Failure to do so could result in unnecessary tax payments and potential penalties. The process involves submitting a relief declaration return to HM Revenue and Customs (HMRC).
Who needs to pay ATED?
ATED applies to companies, partnerships with corporate partners, and collective investment schemes owning UK residential properties valued above a certain threshold.
What properties are subject to ATED?
Residential properties owned by a non-natural person (like a company) and valued above a specified threshold are subject to ATED. This includes houses, flats, and any developments on the property.
How is the property value for ATED determined?
The property value for ATED purposes should be based on its open market value. Revaluations are required periodically to ensure accurate tax calculations.
Are there any exemptions from ATED?
Yes, there are exemptions, including properties used for charitable purposes, as rental businesses, or as part of a property development trade.
What are the rates for ATED?
ATED rates vary depending on the value of the property and are typically updated annually. They are structured in bands, with higher-value properties incurring higher charges.
How and when is ATED paid?
ATED is paid annually, and the tax year runs from 1st April to 31st March. Payment and returns must typically be filed by 30th April each year.
What happens if I don’t comply with ATED regulations?
Failure to comply can result in penalties, including late filing and payment penalties, as well as interest on unpaid tax.
Can ATED be reduced or avoided legally?
While avoidance schemes are not legal, you can legally reduce ATED liability through reliefs and exemptions if the property is used for a qualifying purpose.
What records need to be kept for ATED purposes?
Companies should keep detailed records of the property, its valuation, and any reasons for claiming reliefs or exemptions.
How does ATED relate to other property taxes?
ATED is separate from other property taxes like Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT), but owning a property in a company structure can impact these taxes.
Can the ownership structure of a property be changed to avoid ATED?
Changing ownership structures solely to avoid ATED is not advisable without professional advice, as it can have significant legal and tax implications.