HMRC is writing to taxpayers currently registered for the annual tax on enveloped dwellings, alerting them to a valuation trap that could lead to significant penalties.
HMRC is proactively warning taxpayers about the annual tax on enveloped dwellings (ATED) valuation trap, which can lead to significant penalties for late filing and late payment. An enveloped dwelling is one that is owned or “enveloped” within a corporate wrapper.
When a UK residential property is held through a company (or other non-natural person) it must be valued on acquisition to determine whether it may be subject to the ATED charge, which means an annual ATED return will be required.
When this tax was introduced in April 2013 the lowest-value property the charge could apply to was £2m. This was subsequently reduced to £1m from April 2015 and to the current level of £500,000 from April 2016.
As Natasha Heron explained, all properties falling within the ATED regime must be revalued every five years after acquisition, with the relevant valuation dates being: 1 April in 2012, 2017, 2022, 2027 and so on.
The new property valuation takes effect for the ATED reporting year starting on the following 1 April. Thus, the ATED return and payment for 2023/24 will be based on the value of the property as assessed at 1 April 2022.
HMRC is writing to taxpayers who are currently registered for ATED, to remind them to revalue their properties at 1 April 2022 using an open-market value. This letter will also be copied to the taxpayer’s authorised agent, where there is one.
The Land Registry house price statistics show that the average price of a residential property in the UK has risen from £218,000 to £281,000 in the five years to April 2022, an increase of 29%. This is an average rise across the whole of the UK, in specific regions the increase in values may be greater.
Such leaps in value could result in the property moving up an ATED band for 2023/24. Although the ATED charges for 2023/24 have not been announced yet, moving up an ATED band will at least double the amount of ATED charge due for year, which needs to be budgeted for.
How To Value?
The property valuation doesn’t have to be super accurate to the nearest pound. The owner only needs to know which ATED property band the property falls into.
If the valuation is within 10% of one of the ATED band boundaries (£500,000, £1m, £2m, £5m, £10m and £20m) the taxpayer can ask HMRC for a free pre-return banding check (PRBC). This request must be submitted on the online form and HMRC will take at least 30 working days to reply, so you need to apply in plenty of time before the ATED charge is payable.
There is catch however – the taxpayer must know whether an ATED charge is actually payable for the property, and a relief is not due that would reduce the charge to nil. If no ATED charge is due, HMRC will not provide a pre-return banding check.
New To ATED
HMRC is right to warn taxpayers about the potential effect on their ATED liabilities of increased property values, and it is great to see the department taking a proactive approach to helping taxpayers pay the right amount of tax on time. But it is only writing to those taxpayers who are already registered for ATED.
Property owners who are not currently within the ATED regime, because their properties were acquired for less than £500,000 each, may not be aware of the risk of falling into the ATED reporting regime.
Where the property is commercially let to people unconnected with the company’s owners, full relief from the ATED charge can be claimed, and there are a number of other reliefs and exemptions that can apply.
However, even if full relief from ATED is due, an ATED relief declaration must be submitted by 30 April within the year in order to claim that relief. The relief declaration can cover a portfolio of properties, but the ATED return to declare and pay an ATED charge must be completed for each property.
Penalties Can Mount Up
Failure to submit an ATED return (or ATED relief declaration) on time will result in automatic late-filing penalties. These can amount to £1,600 where a return is over six months late, even if there is no ATED to pay.
Somewhat controversially, HMRC will impose penalties at £10 per day, for up to 90 days, for ATED returns that are over three months late.
In three recent cases (Jocoguma Ltd, Heacham Holidays Ltd and ABF Ltd) the first tier tribunal (FTT) has quashed the daily penalties issued under FA 2009, Sch 55, on the basis that notice of these penalties was not given to the taxpayer ahead of the penalty period. In a fourth case, Priory London Ltd, the FTT agreed with HMRC that daily penalties could be imposed retrospectively.
However, the upper tribunal has now heard the conjoined appeals of Priory London Ltd and Jocoguma Ltd and has decided that HMRC is within its rights to impose retrospective daily penalties, as it could not possibly know whether the company was subject to ATED when it had not registered the property under that regime.
Failure to pay the right amount of ATED charge on time will also generate a late-payment penalty and an interest charge.