Annual Tax on Enveloped Dwellings (ATED)

Many entities which have either not filed ATED returns/relief declaration returns, or that have allowed non-qualifying individuals to occupy the property, may have unexpected tax charges and/or compliance gaps.

In the October 2024 UK Budget, whilst the rate of the Stamp Duty Land Tax surcharge applying to additional property purchases increased from 3% to 5% (and from 15% to 17% for many companies purchasing property), many of the tax rules which apply to the UK real estate sector remained largely untouched.

One such tax which did not see substantive changes was the Annual Tax on Enveloped Dwellings (‘ATED’). This article provides a detailed look at what ATED is and how it operated in the UK real estate sector.

What is ATED?

First introduced in 2013, ATED marked the start of several measures introduced by the UK Government to disincentivise investors in UK residential properties holding such property outside personal ownership. As the name suggests, ATED is an annual tax charge payable by certain entities which own “high-value” UK residential property (or at least the charge formerly exclusively applied to properties which most people would view as high-value).

The charge most commonly applies to companies owning property. However, other entities can include partnerships, unit trusts, open-ended investment companies and other collective investment schemes.

When does it apply and how is it calculated?

ATED applies to properties owned by non-natural persons (examples are included above) and where the value of the property exceeds the taxable threshold. That threshold has been significantly cut since the introduction of ATED, as follows:

• More than £2 million from 1 April 2013
• More than £1 million from 1 April 2015
• More than £500,000 from 1 April 2016

For simplicity, the term ‘UK residential property’ is used in this article. Technically, however, the charge applies to a ‘single-dwelling interest’, such as a house or flat. There are certain exclusions from the definition of a single-dwelling interest, including student halls of residence and hotels.

The charge is calculated based on a chargeable period running from 1 April to 31 March. If a property is held by the relevant entity for the whole year, then the entire annual charge will apply. If the property is either acquired or disposed of part way through the year, the charge will apply on a proportionate basis.

Generally, an ATED return will be required within 30 days of the entity coming within the scope of ATED. This means if a property is acquired part way through a chargeable period, the filing deadline is within 30 days of the acquisition of the property. If a property in scope is held at the start of the chargeable period (i.e. on 1 April), the filing deadline is 30 April.

The annual charge is based on the value of the property and the table below sets out the annual charges for the 2025 to 2026 period and those that have applied in recent years, which have steadily increased over time:

	Annual charge £
Property value	1 April 2025 – 31 March 2026	1 April 2024 – 31 March 2025	1 April 2023 – 31 March 2024
More than £500,000 up to £1 million	4,450	4,400	4,150
More than £1 million up to £2 million	9,150	9,000	8,450
More than £2 million up to £5 million	31,050	30,550	28,650
More than £5 million up to £10 million	72,700	71,500	67,050
More than £10 million up to £20 million	145,950	143,550	134,550
More than £20 million	292,350	287,500	269,450

Unlike a number of areas of UK tax law, the ATED regime generally does not require the taxpayer to have up-to-date valuations of the property on each occasion the property is subject to charge.

Instead, the legislation provides for specific revaluation dates every five years, which generally fixes the value of the property subject to charge for the following five years. The first valuation date was on 1 April 2012, and the revaluation dates are then once every five years after this (1 April 2017, 1 April 2022 etc). The 1 April 2022 valuation date applies to the five chargeable periods starting with the 2023 to 2024 period up until the 2027 to 2028 period.

If a property is acquired part way through any period between these revaluation dates, the value of the property at acquisition is used for ATED reporting purposes until the next revaluation date.

Example

Thierry’s personal company, Gunner No.14 Limited, owns a house in Islington, which he occupies personally, valued at £4.8 million on 1 April 2022. Arsene, a local estate agent, advised Thierry that the property had risen in value and was worth £5.5 million by 1 April 2024.

Whilst ordinarily it may seem that the property had fallen into the higher chargeable category and would be subject to an ATED charge of £71,500 for 2024 to 2025, the fact that the property was valued at less than £5 million on 1 April 2022 means that charges will remain within this bracket.

Therefore, the charge is £30,550 for 2024 to 2025 and the property will remain within this bracket until the 2028 to 2029 period at the earliest.

Reliefs

There are a number of reliefs which can be claimed in respect of “high-value” residential property, such as:

1. Property Rental Businesses
2. Dwellings opened to the public
3. Property developers including exchange of dwellings
4. Property traders
5. Financial institutions acquiring dwellings in the course of lending
6. Occupation by certain employees or partners
7. Farmhouses
8. Providers of social housing

Reliefs generally apply to ‘relievable days’ and so it is conceivable that only certain days within a chargeable period will be part of the calculation of the relief.

Rental business relief

Relief in respect of a rental business is one of the more common reliefs. In order for this relief to be claimed, the entity must be carrying on a qualifying rental business, as defined within the corporation tax legislation.

The business must also be carried out on a commercial basis and with a view to a profit.

Rental activity needs to be genuinely commercial and HMRC will look at a variety of factors when considering whether the property is being let on a commercial basis. These include:

1. Whether the property has ever been marketed to the public
2. Whether the property is being properly managed
3. Extended and repeated periods where the property is unoccupied
4. Whether the business makes a taxable profit

We have first-hand experience of dealing with HMRC enquires into ATED and we are acutely aware that HMRC expect sufficient and detailed records to be provided to evidence that the rental business is being run commercially.

In our experience, it is not enough to simply demonstrate that rental income has been received and has been reported on a separate tax return as evidence that there is a qualifying rental business. There could, therefore, be the risk of both corporation tax (or income tax) and ATED charges applying for certain periods where a business has not been run commercially.

Relief filing requirement

It is also very important to note that an ATED relief declaration return must be filed for the relevant periods, even if relief is available in full. HMRC can issue late filing penalties for the failure to submit ATED relief declaration returns online, even when no ATED charges are due.

The late filing penalties are as follows:

Lateness of filing	Penalty applied
Immediate	£100
3 months late	Daily penalties of £10 per day, up to a maximum of 90 days
6 months late	5% of the tax due or £300 if greater (and so the penalty would be £300 in the context of a relief declaration return).
12 months late	5% of the tax due or £300 if greater (and so the penalty would be £300 in the context of a relief declaration return).

Therefore, if a relief declaration return is 12 months late, then the late filing penalties will total £1,600. HMRC can also issue additional 12-month late filing penalties if the company is found to have deliberately withheld information.

What if the property is unoccupied?

The above begs the question – will days where the property is unoccupied, perhaps because the entity is looking for a new tenant or to sell the property, mean that relief is automatically denied for certain periods? The answer, as you might expect, is it depends.

If rents are not being generated, relief can still be claimed so long as steps are being taken to find a new tenant. This could include periods where re-decoration is being undertaken. Steps being taken can also include the appointment of a letting agent and more substantial alterations to the property to improve the ultimate rental value.

The steps must be reasonable and so it will likely not be enough for HMRC that a letting agent who may not specialise in the type of property in question has been appointed (and this could be both because the agent does not specialise in that location or in high value properties).

There should also not be an “undue delay” in finding a new tenant. This should be read in light of the particular characteristics of the property in question. So, for an ultra-high value residential property in Central London, there will very likely be a more limited pool of potential tenants, which may mean that a longer period between tenants may be reasonable, compared to a property with a more competitive rental value.

It is also possible to claim relief for the period following the cessation of the rental business up until the sale of the property. Periods where properties are converted or demolished may also qualify for relief, but this has not been discussed further in this article.

For the period between the final occupation by the tenant and the point of sale to qualify for relief, the ownership of the property should not change hands before sale and non-qualifying individuals (as discussed further below) should not occupy the property.

It is important to keep continuous detailed records. For example, if the property is sold, HMRC may look for evidence that the property owner has liaised regularly with estate agents and there is a record of viewings etc.

Non-qualifying individuals

The concept of non-qualifying individuals is fundamental when applying many of the reliefs. If the rules are not followed this can mean that not only will HMRC deny relief for future periods, but there is a “look-back” where relief for previous periods can also be denied.

• No relief will be available for the rest of the chargeable period (and the following three chargeable periods) until such time that a qualifying individual rents the property as part of the rental business.
• Relief can be withdrawn for the earlier part of the chargeable period (and the whole of the preceding chargeable period) if during that time a qualifying individual did not rent the property as part of the rental business.

You could therefore view this as up to two years of “look-back” and a three-year “look-forward”.

A non-qualifying individual includes individuals who have an interest in the company and their family members. In a number of scenarios, it may include the settlor of a Trust which holds the shares in the company owning the property, plus their relatives, spouses, civil partners etc.

There is a wide potential pool of non-qualifying individuals and the rules should be reviewed carefully to ensure full compliance.

Example

Thierry no longer occupies the Islington property and decides to rent this out on a commercial basis and claim rental business relief.

On 1 April 2026, having rented out the property for the entire chargeable period preceding this, Thierry hires contractors to undertake some extensive redevelopment work, with the aim of improving the rental value of the property considerably.

On 1 October 2026, a new tenant, who is a qualifying individual, occupies the property.

A year later (1 October 2027) the tenant leaves and the property is empty again. Whilst Thierry engages letting agents to find a new tenant, Thierry allows his sister Leah to stay in the property for a night in November 2027 so she can attend a local football game more easily.

The enhanced rental value of the property and the prevailing economic environment mean that a new tenant is not found until 1 July 2028 and the property is let out from that point onwards.

“Look back” considerations: The default position is that relief will be withdrawn for the entire chargeable period that Leah (being a non-qualifying individual) occupied the property, plus the preceding period. Therefore, it would initially appear that relief could be denied from 1 April 2026 onwards. However, the “look back” only goes as far as the point when the property was occupied by a tenant (who is not a non-qualifying individual) and this was let to them on a commercial basis. Therefore, relief would only be withdrawn from 1 October 2027 onwards in this scenario.

“Look forward” considerations: Ordinarily, as discussed earlier in this article, relief can be available if steps have been taken to rent out the property without ‘undue delay’. However, since the property has been occupied by a non-qualifying individual, relief can be restricted for the entirety of the 2027-2028 chargeable period, plus potentially up to the three following chargeable periods.

Relief is only available again from the point that the property is let commercially to a tenant (who is a qualifying individual) and therefore in this scenario relief is only available again from 1 July 2028 onwards.

Final thoughts

As can be seen from this article, the number of entities caught by the ATED regime has increased over time. Many entities which have either not filed ATED returns/relief declaration returns, or that have allowed non-qualifying individuals to occupy the property, may have unexpected tax charges and/or compliance gaps.

We have great experience in a number of different areas of the ATED regime and can assist should any advice or filing be required.