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Business Tax  •  capital gains tax (cgt)  •  Personal tax  •  Property  •  Tax Planning  •  Taxation

What should I do about the new ATED property taxes?

By Lesley Stalker on 15 April, 2014

The March 2014 Budget announcement extending the ‘ATED’ (annual tax on enveloped dwellings) charge, which is a charge imposed on property owners whose properties are owned by companies, came as a shock to many. Since then we have had a lot of questions from clients asking what the best course of action is, and thought a blog on the topic would be helpful. In particular it seems that a lot of people mistakenly think this ruling only applies to overseas investors owning property in a company wrapper - but that's incorrect. It also affects UK residents and applies to properties owned within any limited company or by a partnership which has a corporate member. We strongly advise against a ‘knee jerk’ reaction to this development by incurring taxes now to re-structure property holdings, because of course it is entirely possible that this charge will be further extended in the future.

To quickly recap, currently residential properties owned by companies (or by partnerships which have a corporate member) and which have a value of £2m are affected by ATED, which is a scaled charge automatically payable to HMRC. From April 2015, any property worth £1m and purchased through a corporate structure will be subject to ATED. From April 2016, the threshold will drop to include any property worth £500,000 owned by a corporate structure. The charges payable will be £7,500 for property worth £1m or more and £3,500 for a £500,000 + property. Those affected will need to file a return by the 1st October in the year when the threshold is reduced, declaring the amount of ATED payable and with the payment due by 31st October. Subsequently, the ATED return is due annually by the 30th April and payment is due on the same date at the start of each year.

For example, property worth £1m held in a company wrapper becomes subject to ATED in April 2015. The annual ATED return should be filed on 1st October declaring the amount payable with payment submitted by 31st October. Thereafter, returns are due by the 30th April with payment due on the same date.

Further details are provided in our recent blog on this topic.

There are exemptions from ATED; largely property developers are exempt from the charge unless they retain any of their developments for rental or other investment purposes. Many property investors choose to do this by for instance developing a block of flats and retaining 2 or 3 apartments within a company wrapper. This strategy will need to be re-thought carefully.

In isolation, for a small property investor with just one or two company owned properties, ATED may not appear to be too significant. However for anyone who owns a property portfolio, especially in the London area, the potential extra cost is considerable. Take the fictitious example of Mr X who owns and rents 30 luxury flats in central London through his property investment company. His annual ATED charge from 2015 could be from £225,000.

Clients have been asking us what they should do now as a result of this development. There are a number of factors to weigh up to be able to answer this question but essentially the alternatives are:

  • Do nothing and accept the cost of ATED as an investment cost. The properties may generate an income and are likely to be appreciating assets, therefore you may consider this option to be financially acceptable.
  • Sell your company-owned property and avoid having to pay ATED when the property is caught by the charge. Tax will be payable on the capital gain now, however the rate of tax payable by companies on gains not yet caught by ATED is 20% to 23%, and on properties caught by ATED it is 28%. In order to avoid forfeiting potential future increases in value, you could replace the ATED property by purchasing a replacement property personally.
  • Transfer the property from company ownership to personal ownership. This option has the drawback of triggering a double tax charge, through the requirement to pay both stamp duty on the personal purchase and corporation tax on the gains realised in the company. Future income from the property will no longer be shielded within the company wrapper and profits must be declared in your personal tax return. Since you retain the property, this option will enable you to continue benefiting from the asset’s future appreciation.

As is probably becoming clear from reading these three scenarios, there is no clear-cut answer to the question ‘What shall I do now to avoid having to pay ATED?’ This is a very clever tax; it is under the radar as far as popular press coverage is concerned but is very similar to the concept of a ‘mansion tax’, which has been previously mentioned. It hits a small segment of the electorate and will most likely generate a significant amount of additional tax without adversely affecting the ‘squeezed middle’ marginal voters that the Tory party hopes to win over in next year’s election. There is nothing to suggest that tax increases on company ownership of property will not continue, and of course there is no reason why they could not be extended.

So, returning to the question of what to do now; the course of action to be taken very much depends on your individual circumstances. If you want to retain the right to benefit from appreciation of property assets, you may need to regard ATED as part of the investment cost. There are alternatives but these are not without cost or risk.

If you would like further advice, please discuss your intentions with us and carefully explore the ramifications before taking action. For more advice on tax on property investments, please contact Lesley Stalker by emailing las@rjp.co.uk.

 

 

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