What is residential property for ATED purposes

Background into ATED regime

This regime became effective as of 1 April 2013. It has been relevant where a UK residential property is owned by a company or ‘non-natural person’.  A reporting requirement only applied where the value of the residential property exceeded the set HMRC limit (slowly reduced from £2M to £500K) as at 1 April 2012 or acquisition date (if later).  ATED charges would apply where exemptions or reliefs did not.

The key change that many would have noted this year is that properties needed to be revalued as at 1 April 2017. This revalue will be relevant from periods 1 April 2017 onwards for the next 5 periods. It has been anticipated that the revaluation will result in more properties falling within the ATED regime.

In addition, this year will be the first year where ATED forms/ returns must be completed via the HMRC online portal, therefore pre-registration of this service must be set up for all relevant clients in advance to the deadline of 30 April.  Failure to submit an ATED form/ return will result in penalties being issued.

For properties that are still paying the ATED, consideration may want to be made to “de-enveloping” them, particularly in light of the recent Inheritance tax changes which mean that the corporate wrapper no longer provides the inheritance tax protection that it used to.

So what is a dwelling?

For ATED purposes a residential dwelling supposedly carries its ‘normal’ meaning i.e. a house or flat which is considered as one residence. This will also include the grounds and gardens or any other land which subsists or is intended for the benefit of the dwelling.

Property covered will be those that are suitable for use as a dwelling or is in the process of being constructed or adapted for such use.  It will also include the interest in UK land which subsists under a contract for an off plan purchase (a contract for acquisition of land that at some point shall involve a dwelling).  This definition effectively mirrors the definition for SDLT and CGT purposes under s116 FA2003.    However, all three taxes have different exclusions regarding certain types of properties that are then not treated as dwellings for their purposes.

HMRC manuals refers to the SDLT manual when looking at the definition of dwelling.  The SDLTM00365 manual stated:

‘Use at the effective date of the transaction overrides any past or intended future uses for this purpose. If a building is not in use at the effective date but its last use was as a dwelling, it will be taken to be ‘suitable for use as a dwelling’ and treated as residential property, unless evidence is produced to the contrary.

Undeveloped land is essentially non-residential but may be residential property if, at the effective date, a residential building is being built on it.

Where, at the effective date, an existing building is being adapted or marketed for, or restored to, domestic use, it is treated as residential property.’

As with the capital gains tax definition the legislation for ATED purposes is broad for what can be deemed a residential property.  The following types of living accommodation do not fall within the definition of dwelling for ATED purposes:

  • a home or institution providing residential accommodation for children
  • a hall of residence for students in further or higher education
  • a home or institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder
  • a hospital or hospice
  • a prison or similar establishment
  • a hotel or similar establishment

These mean that more properties will fall within the exclusions for ATED purposes compared to the SDLT definition of residential properties.

Where a dwelling has been damaged for example a flood or fire and is unsuitable for use as a dwelling, it is possible to not fall within ATED during that period.  The damage must have been accidental or otherwise caused by events beyond the control of the person entitled to the single dwelling interest and resulted in being unsuitable as a dwelling for at least 90 consecutive days.  It should be noted that this is different from the residential definition for CGT and SDLT purposes, where the property interest is still likely to be treated as residential for those purposes.

If a dwelling is demolished and not replaced, for ATED purposes it ceases to exist when demolition first starts.    Again, this is different for CGT purposes as the property interest is still treated as residential until the dwelling has been demolished completely to ground level or to a single façade. If following demolition another dwelling or dwellings is erected for ATED purposes a dwelling will only exist once the rebuild has been completed (usually when the property can be registered for council tax).  For CGT purposes it is likely that the land has always been “residential” as it either had a dwelling on it or was in the process of being adapted as one.

For ATED purposes, what is fundamental is having ascertained that there is a dwelling worth more than £500,000 is the occupation of that dwelling and whether this is by a non-qualifying individual.  For instance, a taxpayer incorporated a company to develop a block of flats with 10 separate residential dwellings for long term rental.  However, he decides to retain one flat as an office to assist with the management of marketing and sales for other developments.   Each individual dwelling has a value of around £500,000.  Of the development nine of the flats will qualify for relief as part of the property letting business by the company.  The one flat used as an office is suitable for use as a dwelling but its current purpose would not be covered by any of the ATED reliefs or exemptions and as such would be liable to the ATED charge.  This would be regardless as to whether the rent was paid by the taxpayer for his occupation.  With the limit for ATED purposes now being only £500,000 it is likely that more properties are occupied in such a manner and would inadvertently fall within the scope of charge.

For further assistance on your property tax queries, please contact either Caroline Fleet or Reshma Johar.