10 Years of ATED – A brief retrospective and notes for the future

April 2023 marks the tenth anniversary of the Annual Tax on Enveloped Dwellings (“ATED”), it having been introduced in the 2013 Finance Act.

The charge was created to discourage the holding of residential property in the UK through corporate structures (enveloping) – especially high value properties for personal use. All companies (whether UK incorporated or not) holding UK residential property (“dwellings”) valued over £500,000 are now within the scope of the annual charge.

The chargeable period for ATED comprises 12 months and runs from 1 April to 31 March of the following year.

The amount of the ATED charge is determined according to which of the six bands the dwelling falls within, the number of chargeable days the property is owned for during the chargeable period and whether any relief or exemption applies. The bands are based on the value of the dwelling on the most recent valuation date. For each range a fixed chargeable amount applies.

The annual chargeable amounts are usually increased each year in line with inflation based on the previous September’s consumer price index (CPI).

Expanding the scope

When it came into effect, only dwellings valued above £2 million were subject to ATED. In 2015 the scope of ATED was significantly expanded, dwellings valued above £1 million were brought into the ATED net from 1 April 2015 and from 1 April 2016 dwellings valued above £500,000 came within scope of ATED.

Therefore, what was originally touted as a charge targeted at high-value residential property is progressively expanding towards encompassing almost all company-owned residential property in the UK.

The table below shows the ATED bands as well as their corresponding annual charges throughout the 10 years of ATED:

As mentioned, the annual chargeable amounts are increased by September’s CPI each year (the most recent increase being 10.1%).

Albert Einstein famously described compound interest as the eighth wonder of the world. As set out above, the ATED chargeable amount for properties in a £2m plus band has increased by over 90% over the 10-year period. Importantly, the main reason for such a large increase was that the Government unexpectedly raised the annual chargeable amounts by 50% for the 2015/2016 period on top of the inflationary increase. The general direction of travel of the annual chargeable amounts is clear (these will only increase over time) and the 2015/16 change is also representative of the fact that even greater increases (over and above inflation) are possible depending on the political climate.

Importantly, the property value bands do not move with inflation so over time more and more properties will come within scope of ATED and properties already within scope will be placed into higher and higher bands.

Other changes

In addition to the gradual creep of ATED, a number of other changes have been put in place in the course of the 10 years since ATED was introduced.

Relief declaration returns

From the 2015/16 chargeable period, chargeable persons who hold properties eligible for a relief may submit a single ‘relief declaration return’ to claim it. This greatly simplified the reporting process for owners of multiple properties eligible for relief (e.g. for property rental businesses).

The operation of the reliefs is not automatic, so without the declaration, no relief applies even if the property is eligible for it. We quite often find ourselves assisting with historic returns to claim reliefs for previous ATED years where this reporting requirement was overlooked. Unfortunately, clients often then find themselves confronted with costly late filing penalties even though no ATED was due.

ATED online system

An ATED online system was launched in the 2017/2018 period, again greatly simplifying the ATED reporting process.

Revocation of ATED-related CGT

Under the Finance Act 2019, ATED-related CGT was abolished with effect from 6 April 2019. From that date on, the relevant tax regime for companies disposing of UK residential property is solely UK corporation tax, a significant simplification of the taxation of gains for non-resident companies. This also took gains from 6 April 2013 to 5 April 2015 outside of an immediate tax charge on the company disposing.

What about the next 10 years?

According to the ATED statistics released by HMRC^[1], ATED has a surprisingly limited scope when it comes to its tax-take. Residential property located in the geographical areas of Westminster and Kensington and Chelsea accounts for the vast majority of all ATED receipts (over 75% on average). This is not surprising, given the attraction of these areas to high net worth foreign investment. However, it does show the geographical concentration of this tax.

Given the reduction of the ATED bands in 2015 and 2016, the gradual increase in house prices and the fact that the ATED bands are fixed it is inevitable that over time more and more corporate owners of UK residential property will fall within the scope of ATED. Furthermore, chargeable amounts will continue to increase with inflation and so will increase over time (obviously at a faster pace when inflation is high, as it currently is).

Therefore, particular attention should be given to whether maintaining corporate ownership in the long term makes economic sense – especially in light of the April 2017 changes to the inheritance tax position of enveloped residential property.

From 1 April 2023 (the start of the 2023/24 ATED year) it will generally be the 1 April 2022 property value which is relevant for ATED purposes rather than the 1 April 2017 value (this is considered further in the following blog post). This may also greatly increase the ATED charge from 1 April 2023 for certain taxpayers.

Generally, it is worth noting that the HMRC statistics show that ATED receipts have been declining year on year since 2015/16. That data suggests that taxpayers are seeking to de-envelope properties in light of the changing tax landscape in the UK. However, while fewer taxpayers fall within ATED we don’t anticipate there being political willingness to abolish ATED any time soon.

How can Burges Salmon help?

We have extensive experience of assisting clients with their ATED returns and liabilities and liaising with HMRC in relation to such returns and taxes. In addition, we have advised numerous clients on how best to restructure their affairs in light of ATED and the inheritance tax changes which apply from April 2017 (including advising on how to unwind structures in the most tax efficient way).

If you or your client would like further guidance on your ATED or UK tax obligations then please contact John Barnett in our Private Client team. 

_{[1]https://www.gov.uk/government/statistics/uk-ated-statistics/annual-uk-ated-statistics-commentary#:~:text=In%20summary%3A,same%20as%20the%20previous%20year (accessed on 4 April 2023)}