Residential property owned by companies: lower tax charge thresholds

Taxing times

18 November 2015

The effect of lower tax charge thresholds on residential property owned by companies will be felt across the UK, says Lorna Sizer, but reliefs are available

Changes to the Annual Tax on Enveloped Dwellings (ATED), which concerns UK residential properties owned by a company or mixed partnership with a corporate member, are set to affect businesses across the country, not only in London.

In the past, this tax did not kick in until the property was worth £2m, keeping many companies outside of traditional property hotspots in the South East of England, out of the loop.

But since 6 April, the annual tax charge now applies to properties with a value of more than £1m and it is possible many more businesses, in many more locations, will find themselves caught in the tax net for the first time.

The valuation to take into consideration is the market value of the individual property as at April 2012 or at the time of acquisition if later (the next valuation point is due to be April 2017).

This is significant for those who have bought recently or who are considering a purchase because property values have risen so sharply in recent years.

A report in the Sunday Times in February 2015 indicated that 400,000 homes across the country, in more than 10,000 streets, are now valued at more than £1m. More than half of those are in London, of course, where experts at Oxford Economics predict the average price of a home could reach £1m by 2030. But significantly, many other areas of the country have also seen big rises in property values, which means ATED is no longer an issue solely for the capital city.

A Daily Telegraph report in May identified St Albans, Bath, Manchester, Cheshire and Edinburgh, for instance, as new £1m hotspots. In fact, there have been £1m sales right across the UK in 2015 – from Christchurch in Dorset and Cheltenham in Gloucestershire to Tynedale in Northumberland and Bradford in Yorkshire.

Despite a recent slowdown around the general election, many experts continue to predict a rising market, some citing figures of up to a 40% increase over the next four years, so businesses that buy residential property need to be aware. The good news is that ATED only applies to residential properties, which means that commercial premises can be ignored.

Properties owned within the company or mixed partnership can also be looked at individually unless there is an internal access between the two (for instance between flats in a single dwelling).

Importantly, too, there are significant tax reliefs which can be claimed to reduce the tax charge to as little as nil even if the property is worth more than £1m.

However, these reliefs must be claimed on an annual ATED return form and this should be actioned as soon as possible.

Tax relief

Relief could be available on:

  • property rental businesses where the property is not occupied by anyone connected with the owner of the company;
  • farmhouses;
  • property acquired to develop and sell on, which is not occupied by anyone connected with the owner of the company;
  • dwellings open to the public for at least 28 days a year;
  • property provided for the use of employees of the company, where the employees do not own more than 10% of the share capital or more than 10% of the partnership.

Now is the time for all companies affected – or those who fear they could be affected in future – to act by seeking advice and getting their tax house in order.

Tax return forms for 2015-16 have to be filed by 1 October 2015 and any tax payable will be due by 31 October 2015. Remember, too, that if the tax return form is missed there will be a £100 penalty charge even where there is no tax payable.

Companies in all areas should keep a close eye on ATED in future, too, because there are certain to be further changes ahead. We already know that the limit will be reduced from £1m to £500,000 with effect from 1 April 2016, affecting more businesses as property prices continue to rise. Preparing early for those changes and seeking good advice is the key to tax efficiency.

Lorna Sizer is Senior Manager at Knill James

Further information

This feature is taken from the RICS Property journal (November 2015)