Changes to the Annual Tax on Enveloped Dwellings

Back in July 2016, I wrote about ATED and Mixed Partnerships, highlighting that the threshold on the charge to tax reduced from 1 April 2016.

As a reminder, the Annual Tax on Enveloped Dwellings targets interests in high-value residential property held by companies, also known as “enveloping”. It does this by imposing an annual charge calculated by reference to the value of a chargeable interest. Broadly, a “chargeable interest” is an interest in or over land which has a dwelling on it. It’s becoming increasingly relevant for our clients, and particularly our farming clients who, for various historical reasons, might operate via a company.

If the company has an interest in a dwelling worth more than £500,000 on 1 April 2012 (or, if  acquired at a later date, the later date), it will be subject to an annual charge to tax for returns from 2016.

The default valuation date for the property is 1 April 2012, or the later date of acquisition (this date also applies to determine if the interest falls within the reduced threshold). This can be of some benefit, because the interest’s historical value may be less than its contemporary value. However, you should bear in mind there are certain events which can trigger a need to revalue the interest.

A revaluation…

For next year’s return, 1 April 2018 to 31 March 2019, the taxable value will be based on a new valuation date - 1 April 2017 (but again, if the interest is acquired after that date, it’s the later date).

As I said in July, the reduction in the threshold for tax was likely to bring more companies within the scope of ATED. This revaluation date increases the chance of a charge to tax, particularly if you consider the change in average house prices over the last five years. According to the H M Land Registry annual price index, the average house price for the UK in April 2012 was £167,854; in January 2017, the average house price was £218,255.

The annual charge for the period 1 April to 31 March 2018 ranges from £3,500 pa for properties worth between £500,000 and £1m, and £220,350 pa for interests in properties worth in excess of £20m. The charge is not to be ignored, and so it’s important to get a valuation sorted now, so that you’re able to assess the position and make a decision in advance of the 2018 return date. Pre-banding checks can also be carried out with HMRC in certain circumstances, which can be helpful.

You don’t necessarily have to get a professional valuation, but the valuation is your responsibility and if you get it wrong and the property is worth more, you’ll need to pay the difference and, potentially, penalties and interest.

Having discussed the changes with Robbie Longstaff of R. Longstaff & Co., he noted  a lack of awareness with some clients of the annual charge, and agreed that it's altogether more likely that a greater number will be affected:

“I believe there is a significant lack of awareness concerning the rules.  The number of properties which now qualify will considerably increase with the change in base valuation date.  Residential property prices have increased considerably since 2012 and with the lower threshold, I believe there are a significant number of businesses who are blissfully unaware that they are breaking the rules.”

Clients should be aware that there are a number of exemptions and reliefs available from the tax charge (such as farmhouse relief and employee/partner occupation), but a return will still be required to claim relief and those who may be entitled to an exemption will need to ensure that they fulfil the special conditions required.