Many of our clients have residential property held within a business structure for one reason or another. Mixed partnerships (i.e. partnerships of individuals and companies) are popular, particularly within the farming industry.
Although ATED was brought in a few years ago, many (clients and advisors) are not familiar with the charge or how it might apply to them (as it’s unlikely to have applied!); so I’ve set out below a little bit about the tax and how it might apply to your mixed partnership.
What is the Annual Tax on Enveloped Dwellings ( ATED )?
The Annual Tax on Enveloped Dwellings was introduced in 2013, with further administrative amendments made in 2014. The tax is aimed at dissuading taxpayers from holding interests in land, specifically high-value residential property in companies, also known as “enveloping”. It does this by imposing an annual charge calculated by reference to the value of the chargeable interest. Broadly a “chargeable interest” is an interest in or over land which has a dwelling on it.
What is the threshold?
When the tax was initially introduced, the threshold at which the charge became payable was £2 million. This was reduced from 1 April 2016, so that the threshold at which ATED will apply is now £500,000; and as a result, a good deal more people and businesses will be caught by the charge.
How does ATED apply to mixed partnerships?
The increased application of ATED has led us here at Roythornes to consider how it might apply to mixed partnerships. The question is, if a corporate partner is not entitled to any of the capital profits and losses of the dwelling under the terms of the Partnership Agreement, does the charge apply?
For the charge to apply, the partnership must have a partner who is a company, with a beneficial interest in the dwelling. In my opinion, the difficulty is in how you determine if the company has a beneficial interest and whether we look at the capital or income entitlement, or something else. When we look to other taxes for help, the question is confused further given that the capital gains tax regime (which applies a capital interest test) and stamp duty land tax regime (which is interested in income entitlement) differ in approach.
One side of the argument is that as partnerships are transparent for tax purposes, we ought to consider the entitlement to capital profits as indicative of beneficial interest. If the corporate partner has no entitlement to capital profits and losses on that residential property then no charge can arise. Further, and given that the determination of whether CGT or corporation tax is paid by companies on gains arising from high value residential property is made by reference to ATED , it would be odd to suggest that a charge to capital gains tax could arise without an interest in the capital profits and losses of that property.
The counter-argument is that ATED is a new tax; and so if the general principles of partnership law should apply, it could be said that each partner has a share in a bundle of rights which comprise his, her or its interest in the partnership, which would include an ‘interest’ in the dwelling. This does not explain however how you value that interest.
Reliefs and Charges
Good news! If a charge does apply, there are a number of reliefs available to clients (such as farmhouse relief and employee/partner occupation), and especially for our farming clients. Don’t forget though, these reliefs must be claimed. Alternatively, some might consider that simply paying the £3 ,500 (for those properties worth between £500 ,000 and £1m ) or £7 ,000 ( £1m to £2m ) charge per year will be worth it. The charge may well be considered good value for the privacy and anonymity offered by the corporate envelope.
Frequently reviewing your business structure and affairs is key to effective tax and succession planning, and our Private Client team are here to help.