ATED tips and traps

8 April 2015

Apologies to all my regular Thursday readers but the electrical fire in Kingsway last week disrupted internet connectivity.  Here is last week’s blog.  The next post is scheduled for Thursday 16 April.

Financially minded Brits will be focused on the impending end of the British income tax year. Here in the office, we’re also focused on the start of another one – the 2015/2016 Annual Tax on Enveloped Dwellings (ATED) tax year begins on 1 April 2015 and, for UK residential properties valued for ATED purposes as worth £2 million or over, owned by ‘non-natural persons’ such as companies, the ATED tax returns and any tax due must be in by 30 April 2015.

The ATED threshold is being lowered to £1,000,000 in ATED tax year 2015/2016 – returns for properties owned on 1 April 2015 and valued as at 1 April 2012 for ATED purposes as being worth over £1 million but up to £2 million must be submitted by 1 October 2015 and any ATED paid by the end of 31 October 2015.

The receipts from ATED have far exceeded the Government’s expectations, netting £100 million in the 2013/2014 ATED tax year alone. In our experience, the Government is doing very well indeed out of penalties and interest arising from late payment of ATED or late filing of the ATED tax return. There is a 5% penalty in respect of any ATED that remains unpaid 30 days after the due date for payment, a further 5% penalty on any ATED still unpaid five months after that date and another 5% if any still remains unpaid 11 months after that date. There are also late filing penalties which, even in respect of properties which qualify for an ATED relief, can still mount up to £1,300 if the return claiming the relief is more than six months late.

Forgetting to pay ATED on time will only get even more expensive in ATED tax year 2015/2016, as ATED rates have steeply increased:

Taxable value              ATED charge 2015/2016
Over £1m, up to £2m £7,000
Over £2m, up to £5m £23,350
Over £5m, up to £10m £54,450
Over £10m, up to £20m £109,050
Over £20m £218,200

We have come across instances where a purchaser has bought the existing company owning the UK real estate, rather than the real estate itself, and found that the company has not been paying ATED when it should have been whilst the company was held by the seller. There may be no redress against the seller in this situation and the purchaser is left with an ATED liability unrelated to his period of ownership, plus penalties and interest.

Purchasers of most property which is subject to ATED also face a very tight deadline, of only 30 days following either completion of the sale or substantial performance of the contract to acquire, to get an in-year ATED tax return submitted (even if only to make a claim for an ATED relief) and any tax paid. The situation is slightly better for owners of a building which is being converted from a commercial into a residential dwelling, or is newly built. Here the period is 90 days but the ATED clock starts ticking on first occupation (a single night’s stay is believed to be sufficient to constitute occupation) or the date of first Council Tax rating. Our experience is that these deadlines are being regularly missed.

Owners of property which qualify for ATED property rental business relief must also remain vigilant that letting is only made to unconnected third parties at commercial rates, otherwise the relief will be lost if a ‘non-qualifying individual’ occupies, not only for the remainder of the ATED tax year in which the individual ceases to occupy but for the next three ATED tax years, unless there is a day of ‘qualifying use’ (e.g. letting to a third party on commercial terms) in that period. These are the look-forward provisions; look-back provisions may also apply.

The ATED compliance burden is due to be eased with the inclusion, in the Finance Bill 2015, of a ‘Relief declaration ATED return’, allowing the same relief to be claimed for multiple properties under the same ownership, rather than a return being needed for each. However, the ATED tax regime still generates a significant compliance burden which seems to fall particularly heavily on unsuspecting new foreign corporate property owners, who may not have even heard of ATED before. It is proving to be a very costly ignorance for some.

Helena Luckhurst Author
Helena Luckhurst
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