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There is a time bomb waiting for property taxpayers according to HMRC
In a proactive move, HMRC is proactively reminding taxpayers to be aware of the annual tax on enveloped dwellings (ATED) valuation trap, which can lead to significant penalties if filed late and paid late. As the name implies, an enveloped dwelling is one that is owned or encapsulated by a corporate entity.
It is important to note that when UK residential property is held through a company (or another non-natural person), it must be valued at the time of acquisition in order to determine whether or not it is subject to the ATED charge, which implies that an annual ATED return must be filed.
At the time this tax was introduced in April 2013, the lowest property value that could be taxed under this tax was £2 million. From April 2015, this amount was reduced to £1m and from April 2016, it was reduced to the current level of £500,000.
There will be a new property valuation for the ATED reporting year beginning on 1 April following the implementation of the new valuation. Accordingly, the value of the property as assessed on 1 April 2022 will be used to calculate the ATED return and payment for 2023/24.
Currently, HMRC is writing to taxpayers who are registered for ATED, to remind them that they need to revalue their properties on 1 April 2022 based on an open-market value. As part of this letter, a copy will also be sent to the taxpayer’s authorised agent, if one is present.
In the five years leading up to April 2022, the Land Registry house price statistics show that the average price of residential property in the UK has risen from £218,00 to £281,00, an increase of 29%, in the five years to April 2022. There is an average rise in property values across the whole of the UK, though in some regions, there may be an even greater rise in property values.
As a result of such leaps in value, the property may move up an ATED band for 2023/24 as a result of these value rises. Despite the fact that the ATED charges for 2023/24 have not yet been announced, moving up an ATED band will at a minimum double the amount of the ATED charge due for the year, which has to be budgeted for.
Depending on the type of property, the valuation does not necessarily have to be accurate to the nearest pound. It is only necessary for the owner of the property to know what ATED band the property falls under.
It is possible for the taxpayer to ask HMRC for a free pre-return banding check (PRBC) if the valuation falls within 10% of one of the ATED band boundaries (£500,000, £1m, £2m, £5m, £10m and £20m). HMRC will take at least 30 working days to respond to your request once sent to their online form, so you will have to submit your application well in advance of when the ATED charge is due so that you do not incur any penalties.
The catch, however, is that the taxpayer needs to know whether an ATED charge is actually payable for the property and whether a relief can be claimed in order to reduce the charge to zero. A pre-return banding check will not be provided by HMRC if there is no ATED charge due.
HMRC is right to warn taxpayers about the potential impact that an increase in the value of their property could have on their ATED liabilities, and it is fantastic to see that the department is taking a proactive approach to make sure that taxpayers pay the right amount of tax on time. However, the letter is only being sent to those taxpayers who are already registered for ATED.
The owners of properties that do not currently fall within the ATED reporting regime may not be aware of the risk of falling into the ATED reporting regime in the future if their properties were acquired for less than £500,000 each.
The ATED charge can be fully waived where the commercial property is leased to persons who are unconnected with the company’s owners. There are also a number of other reliefs and exemptions which can also be claimed when the property is leased commercially.
It is also important to note that even if full relief is due from ATED, an ATED relief declaration must be submitted by 30 April within the year in order to claim that relief. There is a relief declaration that can cover a portfolio of properties, but the ATED return must be completed for each property to declare and pay an ATED charge.
It should be noted that failure to submit an ATED return (or an ATED relief declaration) on time will result in automatic late-filing penalties. In the case of a return that is more than six months late, even if no ATED is due, the penalty can amount to £1,600.
In a somewhat controversial move, HMRC is going to apply a penalty of £10 per day for ATED returns that are over three months late, for a period of up to 90 days.
As a consequence, if you fail to pay the right amount of ATED charge on time, then you will also be charged a late payment penalty and an interest charge.
If you found this article helpful then you may find this guide to property allowance informative or enjoy reading about tax on rentals next?
Simon Thandi
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
Registered in England. Company Number 7319439. Director S S Thandi BA
