If the conditions for a liability exist at the start of a chargeable period, the default position is that the full amount of ATED, also known as Annual Tax on Enveloped Dwellings. This must be paid at the start of that period.
However, there are several ATED exemptions available that can significantly reduce the ATED charges.
The ATED exemptions and reliefs are designed to encourage the use of high-value residential properties for genuine commercial purposes, rather than as a way of avoiding ATED tax and other charges.
Exemptions for Annual Tax on Enveloped Dwelling may be available for properties used as commercial premises, properties let to third parties on a commercial basis, and properties acquired under a regulated home reversion plan, thus reducing the overall ATED charges.
Annual Tax on Enveloped Dwellings Reliefs
The Annual Tax on Enveloped Dwellings Relief is available if:
1. Property Rental Businesses including preparation for sale.
When a single-dwelling interest is used as a source of rents or other receipts during the course of a qualifying property rental business, relief from ATED is available.
Qualifying Property Rental business must be:
- a property rental business i.e., UK property business or an overseas property business and any profit from such business would be chargeable to UK tax.
- carried on commercial basis and with a view to earn profit.
However, relief will also be available where the single-dwelling interest is not currently generating income from the business, so long as immediate steps are taken to rent the property.
The following points suggest that the property rental business is not carried out for commercial purpose:
- The property is not marketed or managed by an independent third party.
- The property remained unoccupied for considerable time. However, relief can still be claimed in this situation if steps was taken to rent the property out. This includes appointing letting agent, re-decorating, more substantial alteration.
- The business is let on a favourable debt like at very low interest which is not normally offered in the market.
As for businesses that rent out homes, relief is not available on any day when a non-qualifying person is allowed to live in a home.
Non qualifying persons are:
- an individual who is entitled to an interest.
- an individual (‘a connected person’) who is connected with a person entitled to the interest.
- if a person is entitled to the interest as a member of a partnership, any person who is connected with a partner in that partnership.
- an individual (the ‘relevant settlor’) who is a settlor of a trust of which a trustee is connected with a person entitled to the interest.
- the spouse or civil partner of a connected person or a relevant settlor
- a relative of a connected person or of a relevant settlor, or the spouse or civil partner of a relative of a connected person or of a relevant settlor
- a relative of the spouse or civil partner of a connected person or of a relevant settlor
- the spouse or civil partner of a person falling within paragraph (7)
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an individual who is a major participant in a collective investment scheme or is connected with a major participant in a relevant collective investment scheme.
2. Dwellings opened to the public.
ATED charges do not apply to a single-dwelling interest that is used to make money in a qualifying trade that lets the public use, stay in, or otherwise enjoy the dwelling at least 28 days a year as customers of the trade.
This is one of the key ATED exemptions that can be leveraged.
The income generated by the single-dwelling interest must be related to the residence and not just be a result of someone visiting the residence for business purposes (for example for a business meeting with the person connected to the owning entity).
If there is a plan to exploit a single-dwelling interest and preparations are being made so that the trade can start right away, relief will also be made available even though the trade in question has not started.
One crucial thing to keep in mind about this relief is that there is no requirement that a non-qualifying person occupy the home. This was done on purpose to guarantee that the relief would be accessible in circumstances where the occupant was affiliated with the owning entity.
If the house's gardens are open to the public and they are permitted access to a small or unimportant portion of the interior (for example, to use the restrooms), this will not be enough to exempt the residence from payment.
The trade must be conducted commercially and with an eye towards making a profit.
If the home is consistently used for significantly fewer than 28 days over several chargeable periods, this might mean that the opportunity is not really open for at least 28 days or that the business isn't being run for profit. Facts and the relevant supporting evidence will be crucial in such situations.
3. Property Developers
Relief from ATED can be claimed by a "property developer" who owns a single-dwelling interest and plans to develop and sell it as part of their business.
Even though the interest must be held only for this purpose, relief under these provisions is still available if the property is held for the purposes of the property developer trade but is rented out before being sold again.
A property development business is one that buys land and buildings and builds on them or fixes them up so they can be sold again. It will also include the sale of land interests, like smaller pieces of land or leases, made from the land that was bought.
Whether a business is a property developer instead of a property trader will depend on the facts. A plan to make small or insignificant changes to a house before selling it quickly is probably not a sign of a property development business. Instead, it may be a sign of a property trading business.
Property developers will also be able to claim relief from ATED when they acquire a single-dwelling interest as a part of exchange.
For example,
A Ltd, a real estate developer, developed a building with 20 apartments, each of which is worth between £3 million and £20 million. It completed the contracts for the sale of Flat 6 to Mr. Z for £4.5 million. After taking possession of the flat, Mr Z decides he would have preferred to buy a larger flat on a higher floor.
A Ltd is still accepting bids for Flat 15 at a price of £10 million. Mr Z agrees to purchase this flat and requests that A Ltd accept £5.5 million in cash, Flat 6, and 50% of A Ltd.’s SDLT liability associated with the purchase of Flat 6 as payment in exchange.
A Ltd concurs. As a result, there is a reverse acquisition because Mr. Z has acquired a new home (Flat 15) from the building developer and A Ltd. is acquiring Flat 6 by way of transfer. Therefore, under these exchange of dwellings rules, A Ltd will be able to make a claim for relief from ATED.
4. Property Traders
ATED relief can be claimed when a single-dwelling interest is held by a person who runs a property trading business (the "property trader") and the interest is held as the stock of the business and for the sole purpose of reselling in the course of that property trading business.
A business that buys and sells homes is called "property trading." For the business to be a trade, it must be done in a business like way and with the goal of making money. All of the facts will have to be looked at to decide whether or not that trade is done for profit.
If a company buys a property with the hope that it will be worth more in a few years, that may not be enough to count as a trade. It could be an investment activity that is not eligible for ATED relief.
5. Financial Institutions Acquiring Dwellings in the course of Lending.
Financial institutions that own single-dwelling interests can claim ATED relief. A financial institution that repossesses a property as a result of lending money is exempt from ATED.
In some cases, the financial institution may take legal and beneficial ownership of the property under its security interest, which is not a chargeable interest.
The relief will be available when:
- The financial institute is engaged in the business of lending money.
- The interest in the dwelling is occupied by such financial institute as non- payment of the money that was lend.
- The financial institute holds the interest in the dwelling with an intension of selling it without any delay. However, any justifiable delay is acceptable.
6. Occupation by certain employees or partners
In certain circumstances, a trading company may own a dwelling to provide housing for employees.
Such a residence may be exempt from ATED if certain requirements are met.
It is not necessary that an employees must occupy such dwelling as long as the person occupying is part of the employee or partner’s family. The conditions are:
- The person must be entitled to a dwelling.
- The company or the companies within the same SDLT group must carry on a trade on a commercial basis.
- The dwelling must be used for providing the living accommodation.
- The dwelling must be made available to meet the purpose of carrying on the trading activity by the company.
7. Farmhouses
A farmhouse which is occupied by a farm worker, or a former long-serving farm worker qualifies for ATED relief. The farm worker must be substantially involved (generally 20 hours per week) in the day to day farming or managing the farming trade with a view of earning profit.
A person is a "former long-serving farm worker" if they worked on a farm for three years or more, or if they worked on farms for a total of three years or more over a five-year period.
A farmhouse must:
- be on qualifying trade land. If a farm worker lives in a detached property, relief is not available.
- Be owed by person engaging in farming or by someone connected to such person.
- Be occupied by a farm worker for farming purposes, or by a former long-serving farm worker or their spouse or civil partner.
- Be used in carrying out the farming trade on a commercial basis.
8. Providers of Social Housing
An owner of the single-dwelling interest who provides social housing may apply for relief from ATED.
The social housing provider must be a "profit making registered provider of social housing" or a "relevant housing provider" in order to be eligible to claim the relief.
The single dwelling interest had to have been purchased with the aid of a public subsidy in order to be eligible for relief. The subsidy does not have to cover the entire cost of the acquisition. Any grant or other form of financial assistance falls under the definition of "public subsidy" as stated in Section 71(4) FA 2003 of the SDLT legislation.
A relevant housing provider is one who meets the requirements and is either a registered social landlord or a registered non-profit provider of social housing.
The following criteria must be met in order for relief to be granted:
- the relevant housing provider must be controlled by its tenants.
- the person from whom the relevant housing provider acquired the single-dwelling interest, or a portion of the interest, must be a "qualifying body;" and
- the relevant housing provider must have paid for its acquisition with the help of a public subsidy.
9. Acquired under Home Reversion plan.
ATED relief is available for properties acquired under a regulated home reversion plan in certain circumstances.
If a company acquires a property under a regulated home reversion plan, it may be able to claim relief from ATED if the property is used for a qualifying purpose.
To qualify for relief, the property must be:
- acquired by the company under a regulated home reversion plan.
- occupied by an individual who is entitled, for life or until a specified date, to possession of the property under a home reversion plan that is regulated by the Financial Conduct Authority (FCA).
- the individual must not be a connected person of the company, and
- the property must not be let to anyone else.
If the property meets these conditions, it will be treated as qualifying for relief from ATED. However, the relief must be claimed by the company on an ATED return, and the company must provide evidence to support the claim, such as a copy of the home reversion plan.
‘Homes for Ukraine’ Sponsorship Scheme
The government introduced the Homes for Ukraine programme on March 14, 2022. This programme enables UK residents to sponsor a named Ukrainian individual or family to move to the country and live with them, provided they have suitable housing to offer.
This measure will come into effect from 1 April 2022 for Annual Tax on Enveloped Dwellings.
The chargeable person will be treated as if they are operating a real estate rental business in cases where a single dwelling interest was not eligible for ATED relief prior to being used under the Scheme and the entire single dwelling interest is exclusively occupied by people fleeing Ukraine.
