ATED - Annual Tax On Enveloped Dwellings

The annual tax on enveloped dwellings (ATED) was enacted by the Finance Act 2013.

The tax was introduced to dissuade the acquisition of UK real estate through non-natural persons (so-called enveloping), mainly used to avoid the charge to Stamp Duty Land Tax or to leave the property out of one person’s estate for Inheritance Tax purposes.

ATED was levied on non-natural person holding UK high-value residential property (HVRP) worth more than £2m from 1 April 2013.

From 1 April 2015 the value of HVRP subject to this tax was lowered to £1m and from 1 April 2016 the threshold was set at £500,000.

The result is that any non-natural person owning a UK residential property valued at £500,000 or above is liable to ATED unless a relief applies.

What is a non-natural person?

For ATED purposes a non-natural person is a company, a partnership or a collective investment scheme.

The country of residence of a person is irrelevant for ATED purposes but partnerships are only within its scope if at least one of the partners is a company.

A person is only chargeable to ATED if it holds a chargeable interest.

According to Section 107(1), Finance Act 2013, a chargeable interest is:

• An estate, interest, right or power in or over land in the UK;

• The benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power.

An estate or interest in land is a single dwelling interest if the land consists of a single dwelling.

What is a dwelling?

The definition of dwelling given by section 112(1), FA 2013 is vague.

The section states that a building, or part of it, is a dwelling at any time when it is used or suitable for use as a single dwelling or it is in the process of being constructed or adapted for such use.

As the definition includes “part of a building” it also catches flats.

More important is the concept of “used or suitable for use as a single dwelling”.

Is a derelict house suitable for use as a single dwelling?

The ATED legislation does not go any further into details about this but the case PN Bewley Ltd v HMRC [2019] UKFTT 65 (TC) gives some guidance on the subject even if it regards the potential payment of the additional 3% rate of SDLT on the acquisition of a UK property.

In the case the FTT held that a dilapidated bungalow was not suitable as a dwelling and so was not subject to the SDLT surcharge.

The tribunal found that the property was unsuitable for dwelling use because it had to be demolished and it was uninhabitable due to the need to remove the heating system, pipes and floorboards.

Therefore, where a property is temporarily unsuitable for use as a dwelling due to accidental damage or repairs the temporary unsuitability is ignored.

How much is the charge?

The chargeable amount for a single-dwelling interest is based on the taxable value of that interest and it depends on which of the taxable value bands the dwelling falls within.

A period for ATED purposes runs from the 1 of April to the 31 March of the following year.

For the period 1 April 2022 to 31 March 2023 the chargeable amounts are:

ATED is charged for the whole period unless the interest is either acquired or disposed of during a chargeable period.

In the first case, a return must be filed and the charge must be paid within 30 days from the date of acquisition.

There are exceptions to the general rule where either a new dwelling is acquired or an existing dwelling is altered to become a different dwelling. In those cases the deadline to file a return and pay the charge is 90 days.

Is there any relief available?

Yes, reliefs for some activities are available as follows:

• Property rental business relief
• Property development trade reliefs
• Property dealers relief
• Employee/partner occupation relief
• Caretaker relief
• Social housing relief
• Financial institutions relief
• Farmhouses reliefs
• Dwellings opened to public relief

Penalties for failing to file a return or make a payment on time

If a person fails to file an ATED return or to pay the charge on time HMRC will apply penalties that can be broken down into the followings:

• failure to file a return by the due date (para. 7(1), Sch. 34, FA 2013)
• late payment (para. 8 and 9, Sch. 34, FA 2013)
• errors in returns (para. 6, Sch. 34, FA 2013).

Furthermore, in case of a missed payment, late payment interest will be charged on the outstanding amount due to HMRC.

Late filing penalties are charged under three categories:

• a flat £100 for failing to file the return;
• daily penalties at £10 per day for up to 90 days if the return is more than three months late;
• a percentage of the unpaid tax, currently at 5%, if the return is more than 6 or 12 months late. If the outstanding amount of tax is below £300 HMRC will charge this amount rather than the 5% rate.

A few appeals have been lodged by taxpayers with the tribunals against the applicability by HMRC of daily penalties for not filing a return on time.

In Heacham Holidays Ltd v HMRC [2020] UKFTT 406 (TC), the FTT allowed the taxpayer's appeal against daily penalties for the late filing of an ATED return.

The tribunal confirmed that a notice of daily penalties could not be issued retrospectively to the period to which those penalties related as required by paragraph 4(1)(c) of schedule 55 FA 2009.

HMRC’s view on this has always been that there is no statutory requirement for the notice imposing daily late filing penalties under paragraph 4 to be prospective in timing and that the legislation expressly provides that the date from which the penalty is payable can be retrospective.

Therefore, the latest decision held by the Upper Tribunal in Priory London Ltd v HMRC and Jocoguma Properties Ltd [2022] UKUT 225 (TCC), confirmed that late filing notices given by HMRC to a taxpayer under paragraph 4 of Schedule 55 to FA 2009 can be given retrospectively.

This should end the uncertainty around the subject.

Surprisingly, even if the charge was introduced in 2013 there are still many taxpayers who are ATED non-compliant because they are resident abroad and unaware of the charge and its annual obligations.

If you need to know if you are subject to ATED or must file an ATED return please get in touch.