The pitfalls of Annual Tax on Enveloped Dwellings

20 July 2018

If you already own or intend to purchase residential property through a company or an LLP you need to be aware of the Annual Tax on Enveloped Dwellings (ATED) and the filing requirements. This relatively new tax has not been well publicised by HMRC and yet the penalties for failure to file are hefty!

ATED is relevant where non-natural persons own residential property worth £500,000 or more. If caught by ATED the entity is required to file annual returns with HMRC. In the vast majority of cases the entity will be able to claim relief from the tax charge as they will be either:

  • Let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by the owner or anyone connected with the owner
  • Being developed for resale by a property developer
  • Owned by a property trader as the stock of the business for the sole purpose of resale
  • Being used by a trading business to provide living accommodation to certain qualifying employees
  • A farmhouse occupied by a farm worker or a former long-serving farm worker
  • Owned by a registered provider of social housing.

However, ‘Relief Declaration Returns’ still need to be submitted by the specified dates or penalties will be issued by HMRC.

If relevant properties are purchased during the year, ATED returns need to be filed within 30 days(!) of the completion. HMRC check land registry submissions, chase up late submissions and issue late filing penalties so do beware! Unfortunately, many conveyancing solicitors are not familiar with ATED, so it is wise to keep your accountants promptly appraised of any future property purchases which will enable them to register and submit your ATED returns within the tight timeframe.

ATED returns are then required annually for each tax year. Annual returns must be submitted by 30 April following the start of the tax year if the entity owns residential property at the beginning of April which has a value of £500,000 or more. Failure to file either a chargeable return or a relief declaration return can lead to HMRC issuing late filing penalties.

The penalties range from £100 to £1,600 for a return not filed within one year of the due date, for both ‘in year’ and ‘annual’ ATED returns.

Where none of the above reliefs apply, Annual Tax on Enveloped Dwellings will apply. The most common situation where the charge will apply is where the property is being used by a director of the company or a member of their family. A property with a value between £500,000 – £1,000,000 has a charge of £3,600 for tax year 2018/19. There is a significant jump to £7,250 for a property worth £1,000,000 – £2,000,000. Failure to pay the ‘Annual Tax’ will lead to interest and surcharges being issued. The ‘Annual Tax’ due depends on the value of the property.

So, if your entity currently owns residential property with a value of £500,000 or more, or in the future purchases, disposes or changes the use of property of this value, make sure you get in touch with your advisers as soon as possible so they can confirm whether or not ATED is relevant and take the appropriate action!

Avoid ATED pitfalls!

If you think you may be required to pay ATED and need assistance with your returns, please contact me or your local UHY adviser. Alternatively, fill out our contact form here.