Corporate Landlords And The ‘ATED’ Trap

ATED – short for ‘annual tax on enveloped dwellings’ – is a three-pronged instrument to counter certain tax schemes to avoid SDLT by individuals using a corporate vehicle to acquire a property, which they intend to use as a home. The ATED rules are aimed at high value residential properties – when ATED was introduced in 2013, ‘high value’ meant ‘more than £2 million’, but the threshold has gradually reduced to £500,000.

There are three prongs to the ATED ‘fork’. These are:

an annual charge, which is calculated by reference to the value of the property – this is based on a banding system;
a higher 15% SDLT rate for residential property acquired by a ‘non-natural person’ in circumstances where the ATED conditions apply; and
ATED-related capital gains tax, which applies on the disposal of the property.

The idea is to levy ATED charges when property is acquired and held by ‘non-natural’ persons. As well as catching companies, the charges also apply to partnerships with a company member and collective investment schemes such as unit trusts. Furthermore, ATED applies irrespective of the tax residence of the persons involved.

It is unlikely that a company operating a buy-to-let business would be affected by these charges. ATED is aimed at those who seek to live in the property themselves, rather than rent it out to others. But there are traps, as we shall soon find out.

Don’t forget to submit a return

There is in fact a specific relief from the annual charge for property investors letting out residential property (FA 2013, ss 133-134). But just because there’s a relief doesn’t mean that one can forget about the ATED rules. If a property is above the ATED threshold, there is still a requirement to claim the relief by submitting a ‘relief declaration return’.

The return must be submitted by 30 April of each year to claim relief for the chargeable period that begins on 1 April. Once a return is submitted, it covers all properties in the portfolio that are above the ATED threshold, and automatically includes any properties acquired later on in the relevant year (FA 2013, ss 159, 159A).

Failure to submit a return – or submitting it late – can result in penalties applying (FA 2009, Sch 55). The starting penalty is £100, but the amount can escalate quite rapidly – so it’s a good idea to send the form.

The ATED trap – be careful who you let the property to

There are, of course, strings attached to the reliefs. The main restriction is the prohibition on allowing certain individuals linked to the landlord from occupying the property, even if they are paying a full market rent (FA 2013, ss 135, 136). Such individuals are known as ‘non-qualifying individuals’. For example, when the landlord is a company, non-qualifying individuals consist of the following people:

any individual who is connected to the corporate landlord, such as a controlling shareholder;
the controlling shareholder’s spouse or civil partner, as well as their relatives, and any spouse or civil partner of those relatives; or
the controlling shareholder’s relatives, as well as their respective spouses or civil partners.

For these purposes, a relative is either a brother, sister, ancestor or lineal descendant.

The following example shows how things can go very badly wrong.

Example: Property let to relatives for short term

Wendy is the sole shareholder of Neverland Properties Limited (‘Neverland’), which operates a residential property business. On 1 January 2017, the company acquires Hook House for £7 million, which after a short period is rented out to Smee on 1 May 2017. The property is above the ATED threshold of £500,000, but Neverland can claim relief as a property investor.

Smee vacates the property on 31 December 2018, and the house remains empty until 1 August 2019 when Wendy’s brother Michael moves in for a one month holiday. When Michael moves out, the company is unable to find a tenant, so the house is put on the market and eventually sold for £12 million on 1 January 2021.

Because Michael is the brother of Wendy, the company’s controlling shareholder, he is regarded as a non-qualifying individual. Accordingly, there is a loss of ATED relief – however, the loss of relief isn’t restricted to his period of occupation, as one might expect.

ATED chargeable period	Time period	Occupier
1 April 2016 – 31 March 2017	1 January 2017 – 31 March 2017	Property empty, but ATED relief available as part of rental business and is on the market to let.
1 April 2017 – 31 March 2018	1 April 2017 – 30 April 2017
	1 May 2017 – 31 March 2018	Smee (tenant) – ATED relief available as property is occupied by a tenant.
1 April 2018 – 31 March 2019	1 April 2018 – 31 December 2018
	1 January 2019 – 31 March 2019	Property empty – ATED relief should apply as it is on the rental market, but relief is clawed back due to Michael’s occupation.
1 April 2019 – 31 March 2020	1 April 2019 – 31 July 2019
	1 August 2019 – 31 August 2019	Michael – ATED relief unavailable as Michael is a non-qualifying individual.
	1 September 2019 - 31 March 2020	Property empty – ATED relief should apply as it is part of a rental business and is on the market for sale, but relief is unavailable due to Michael’s previous occupation.
1 April 2020 – 31 March 2021	1 April 2020 – 31 December 2020

Looking forward (periods subsequent to occupation by non-qualifying individual) – Any void period that falls within the current and subsequent three chargeable periods is ineligible for the relief.

The only way to get the relief back again within this timeframe is to find a tenant as quickly as possible.

In this example, it follows that two whole years’ worth of relief is lost, and not just a single month. This amounts to a tax bill of more than £100,000 (assuming that the current bands still apply).

Unfortunately, the bad news doesn’t stop there.

What about the capital gains charge?

There is a gain of £5 million (£12 million - £7 million) when Neverland sells the property. Normally, this gain would be taxed at corporate rates, giving a tax charge of £850,000 (assuming a rate of 17% for the year beginning 1 April 2020). However, because the property was subject to ATED, part of the gain is taxed at the higher 28% rate.

	Gain	Tax
Unadjusted gain	£5 million
Adjusted for ATED: (731/1461) x £5 million @ 28%	£2.5 million	£700,000
Balance of gain at corporate rates @ 17%	£2.5 million	£425,000
Total tax		£1,125,000
Effective tax rate		22.5%

The ATED rules are quite draconian in this regard. When (Note: For the ATED gain, adjust the whole gain by the fraction 731/1461, where the number of days’ subject to the ATED charge is 731 and the total number of days when the property was owned by the company is 1,461).

Practical Tip: Choose your tenants wisely!

If you’re looking to invest in residential property and want to use a company, ATED will not normally be an issue, provided the relevant relief forms are submitted in time. However, you need to be careful about who you choose as tenants. This is particularly relevant in the context of owner- managed or family run businesses. So, don’t live in the property yourself, and if a family member asks you, just politely and firmly point them in the direction of that nice little hotel down the road!