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ATED and the impact on farming companies

December 2015 - Published by ICAEW Farming and Rural Business Group ©ICAEW

The advantage of low corporation tax rates has made incorporation a very attractive proposition, leading to the establishment of a flurry of corporate partners within partnership structures.

This has subsequently become very unattractive, with the Annual Investment Allowance (AIA) not being available to partnerships with a corporate partner.

When introduced in 2013 the annual tax on enveloped dwellings (ATED) only applied to dwellings worth more than £2m, provided they were owned, wholly or partly, by a corporate body. The lowest rate of ATED, (properties worth £2m - £5m) was then £15,000 pa.

Property value Annual charge
£0.5 to £1m (from 1 April 2016) £3,500
£1 to £2m (from 1 April 2015) £7,000
£2 to £5m £15,400
£5 to £10m £35,900
£10 to £20m £71,850
More than £20m £143,750

Many companies and partnerships own residential property as a genuine business asset, and ATED was never intended to apply to them. They can generally claim relief from the three associated charges if they are:

  • property rental businesses;
  • property developers;
  • dwellings used for trade purposes (occupation by qualifying employees and partners);
  • farmhouses (occupation for the purposes of carrying on a trade of farming); or
  • dwellings open to the public.

There are exemptions aimed at property rental businesses, dwellings occupied by qualifying farm workers and dwellings open to the public. But all exemptions are subject to stringent conditions and must be claimed each year in an ATED return.

ATED is payable however small the company’s ownership share is. A 0.01% equity share belonging to a company gives rise to a full ATED liability on all the property’s owners. Partnerships with a corporate partner are treated similarly. 

Corporate owners who qualify for property rental business relief from ATED must avoid letting anyone connected with the company into occupation of the dwelling, even for just one day. This heinous offence is punishable by denial of the property rental relief for the ATED year in question, the following three years and for the preceding year. For a dwelling worth £1.5m, that one day could cost the company some £35,000 in ATED. Corporate owners of dwellings caught by the ATED provisions with effect from 1 April 2015 must ensure that all connected persons have ceased to occupy by the end of March if they are to avoid suffering denial of property rental business relief.

ATED affects UK residential property that is wholly or partly owned by:

  • a company;
  • a partnership with a corporate member (a corporate partner); or
  • a collective investment vehicle, such as an open-ended investment company (OEIC).

The threshold at which the charge comes into force is currently reducing, and with corporate partners being included in the charges together with small shareholding, a large number of farm enterprises are going to be caught within the ATED trap.

Three taxes that might be levied:

  • SDLT at 15% on property purchases. This will apply where a corporate structure acquires a relevant property.
  • An annual charge based on the property’s value on 1 April 2012 or the date it was purchased (if later). It is worth noting that, at present, existing property in a structure will be based on this historic valuation and may therefore fall below the threshold it would otherwise reach, if based on a contemporary valuation. However, the government intends to revisit this in 2017. When an investor believes that the relevant property falls within 10% of a relevant ATED banding, it is possible to write to HMRC to request a “pre-return banding check” to gain more certainty about the charge. This service is not available if a relief is being claimed.
  • Capital gains tax at 28% when the property is sold. This rate is equivalent to the highest rate at which this tax is paid by an individual, and it is higher than the 20% corporation tax charge which a UK company would normally be subject to on chargeable profits. The gain is calculated on the increase in value since 6 April 2013.

The ATED taxes may seem arbitrary and something to be avoided at all costs but there are other factors that need to be considered before such structures are dismantled.

The impact of ATED on farming cannot be underestimated and there is a need to review situations where ATED will apply and how the charge can be reduced through restructuring or applying for exemptions.

Julie Butler FCA, Butler & Co
Farming and Rural Business Group, July 2015

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