Pushing the envelope - ATED charges

As the scope of tax charges on certain residential properties increases, is your farming business at risk of unexpected annual costs?

The annual tax on enveloped dwellings (ATED) was introduced by the Finance Act 2013. It was part of a suite of measures introduced to halt perceived tax avoidance on the holding of residential properties through companies (other elements included a new 15 per cent charge to SDLT).

When ATED was introduced, it applied only to dwellings with a market value in excess of £2 million. However, this threshold was reduced to £1 million (with effect from 1 April 2015) and is to be further reduced to £500,000 (with effect from 1 April 2016). A cynic might suggest that a measure introduced on the basis of encouraging taxpayers to “de-envelope” homes is quickly becoming a useful revenue raising measure for a cash-strapped Treasury.

While not many farm businesses include dwellings worth more than £2 million, plenty of them have farmhouses with a value in excess of £500,000. What should those potentially affected be thinking about doing?

The ATED charge

The ATED applies if a company, partnership with at least one corporate partner, or collective investment scheme owns a dwelling with a market value in excess of £1 million (from 1 April 2016, this will be £500,000). The property can be held either freehold or leasehold – what matters is the value of the interest owned.

The value of the dwelling is assessed on certain valuation dates (1 April 2012 and at five yearly periods thereafter, so 1 April 2017, 2022, 2027 and so on, and the date of any substantial acquisition or disposal). So, for example, a dwelling potentially within the scope of ATED would need to be valued when acquired, and again on 1 April 2017. Taxpayers can, in certain limited circumstances, ask for HMRC confirmation of value – but generally speaking, the introduction of ATED is good news for property valuers.

If the ATED applies:

• A return needs to be submitted to HMRC every year (usually within 30 days of 1 April). 
• The relevant ATED charge is paid, or ATED relief is claimed, at the same time.

The precise ATED charge levied depends on the value of the dwelling. For example, a dwelling worth more than £1 million but less than £2 million would suffer a charge of £7,000. The annual charge for dwellings worth more than £500,000 but less than £1 million will (from April 2016) be £3,500.

Reliefs

Unlike SDLT, the ATED is an annual charge – so its application, and the application of any relevant reliefs, depends on the use of the dwelling throughout the ATED year (1 April to the following 31 March). This gives rise to the concept of “relievable days” (ie, days during that annual period where the conditions for a relief are met) and “chargeable days”. The annual charge is reduced by the proportion of relievable days to chargeable days. The ideal scenario, of course, is to have 365 relievable days and so no ATED charge at all.

For farming businesses, there are a few reliefs which may potentially assist:

• Property rental business: if the dwelling is used for the purposes of a genuine property rental business, run with a view to profit, then this may give rise to relief from ATED. However, care is needed as regards the identity of the occupant(s) of the dwelling – broadly speaking, the tenant must be an unconnected third party because any occupation by a “non-qualifying individual” can prevent the relief applying (ie, you are unlikely to escape ATED by leasing the farmhouse to a director or shareholder of the company owner). 
• Property development: relief may be available if the relevant company or partnership holds the interest for the purposes of a qualifying property development trade, though again this considers any occupation of the dwelling by a “non-qualifying individual”. 
• Farmhouses: there is an ATED relief where a person carrying on a farming trade (or connected to someone carrying on such a trade) owns a farmhouse that forms part of the land occupied for the purposes of carrying on that trade. To qualify for the relief, the farmhouse must be occupied by a farm worker occupying it for the purposes of the farming trade (or a former long-serving farm worker, or the surviving spouse/civil partner of a former farm worker). To qualify as a farm worker, the individual must be substantially involved in the day-to-day work of the farming trade, or the direction and control of the conduct of the trade. 
• Employees: a limited ATED relief applies where a trading company owns a dwelling it uses mainly as employee accommodation. However, this exemption should be viewed with caution in the farming context – because it doesn’t apply if the employee has certain levels of ownership rights in the company which owns the property (so may not apply to that many family-owned farming companies). 
• Dwellings open to the public: typically, this exemption could apply to farmhouses used as B&Bs (though there are conditions as to how many days per year the public must be allowed to stay, and the extent of the house which must be set aside for public use).

Next steps

What are the next steps for farming estates concerned about the potential application of ATED to their farmhouses?

First, they should seek professional advice as to whether or not they are potentially caught and/or whether or not any ATED relief may apply. This may involve discussions with valuers for borderline cases, as well as tax advisers.

Second, if ATED applies and a relief is not currently available, can arrangements be changed to allow a relief to be claimed?

Those with farmhouses worth around £500,000 which are owned by companies (or partnerships with corporate partners) should be thinking through these issues now – because once the ATED is extended on 1 April 2016 there will only be a limited 30 day period to submit the return to HMRC, and pay the charge – or, hopefully, claim the relief.