What is an NNP?

Before we look at changes to ATED in more detail, it is essential to recognise the definition of an NNP. This description covers numerous bodies, such as:-

• A company
• A partnership (with a corporate partner)
• A collective investment scheme
• Trusts

Anybody holding property in their own right will not be liable for ATED.

What is the purpose of ATED?

Introduced on 1 April 2012, ATED is an annual tax targeting UK residential properties owned by NNPs. All properties valued up to £500,000 are exempt from the tax with a sliding scale on those valued upwards of £500,000. Initially, when the scheme was introduced, properties valued at up to £2 million were exempt from the tax. However, in 2015 the exemption was reduced to £1 million and then down to £500,000 in 2016.

While income tax bands tend to increase in line with inflation, this has not been the case for the ATED thresholds. Since inception, they have remained unchanged at:-

Property value for ATED

Up to £500,000 (exempt from ATED)

£500,000 – £1 million

£1m – £2m

£2m – £5m

£5m – £10m

£10m – £20m

£20m +

As you might have guessed, while the ATED tax bands have remained rigid, annual tax charges have increased year of year in line with inflation. The following table gives you an idea of the long-term impact:-

Property value	Start date	Start Rate	2023 rate	Overall increase
Up to £500,000	n/a	n/a	n/a	n/a
£500,000 – £1 million	April 2016	£3500	£4150	+19%
£1m – £2m	April 2015	£7000	£8450	+21%
£2m – £5m	April 2013	£15,000	£28,650	+91%
£5m – £10m	April 2013	£35,000	£67,050	+92%
£10m – £20m	April 2013	£70,000	£134,550	+92%
£20m +	April 2013	£140,000	£269,450	+92%

Some of the early tax charges have increased significantly over time!

Changes to ATED going forward

Those properties acquired by an NNP before the introduction of ATED in April 2012 would have been revalued as of 1 April 2012. Since its inception, the idea was to revalue all NNP-held properties every five years.

The 2012 valuation would dictate ATED liabilities for the subsequent five tax periods, 2013/14 up to 2017/18. On 1 April 2017, all NNP-held properties were again revalued, with the new figure used to calculate tax payments for the five years from 2018/19. Any potential ATED liability on properties acquired between valuation dates would be based on the purchase price, prior to the next wholesale revaluation.

Currently, ATED charges cover the period from 1 April to 31 March and are paid in advance by the end of April. In the last budget, the Chancellor confirmed the new valuation point for properties held by NNPs and increased tax charges in line with (high) inflation. As a result, all properties will now be revalued as of 1 April 2022, with this figure used as a base to calculate any ATED for the five periods starting in 2023/24. On a side note, if part of an ATED qualifying dwelling is sold for more than £40,000, this will trigger a revaluation for ATED purposes.

What is classified as a dwelling?

Dwellings are best described as properties where all or parts are/could be used for residents. This will take in houses and flats, and the valuation will also include gardens, grounds and additional buildings. It is important to note that the valuation is not just based on the residential building itself when part of a more extensive development.

Specific residential properties are exempt, undeveloped land is only subject to ATED in certain circumstances, but residential properties under construction, or those adapted as residences, will be subject to the ATED criteria.

Are there any exemptions from ATED?

While technically, they are built to house people; several properties are not considered dwellings for ATED purposes. These include:-

• Prisons
• Care homes
• Halls of residence
• Military accommodation
• Hotels
• Boarding schools
• Hospitals
• Guesthouses

It is vital to take advice if unsure whether an NNP held property should be classed as a dwelling. In some situations, relief may be available to reduce your ATED or bring it down to nil.

Submitting your ATED return and taxes

All ATED submissions are made using the HMRC online service, with many people using their accountants to calculate potential ATED liabilities. Your return (and any taxes due) should be submitted before the end of April during the taxable period. Late or inaccurate submissions will likely attract penalties. This is where the value of your accountant comes in!

Statistics about ATED

The UK government has compiled a list of interesting statistics about ATED, which may surprise many people. For example:-

• ATED receipts have fallen each year during the period 2015/16 up to 2020/21
• 2020/21 receipts came in at £111 million (a fall of 13% on the previous year)
• ATED income decreased in all bands except for the £500,000 – £1 million range
• 85% of total ATED receipts in 2020/21 came from London, dominated by the boroughs of Westminster and Kensington and Chelsea

Yet again, London dominates the UK property market!

Summary

Property price movements before, during and in the aftermath of Covid have been mixed in different areas of the country. The heavy dependence on London dwellings, and challenging market conditions, may explain the short-term fall in ATED receipts. However, in the long term, the value of dwellings tends to rise; therefore, the rigid ATED tax bands will draw more properties into the tax threshold each year.

Conversely, as mentioned above, individual tax band charges increase in line with inflation, with a significant rise this year. As a consequence of the revaluation and an across-the-board increase in tax rates, ATED income will likely rise in the short term. Yet again, the Chancellor has done no favours for NNPs holding dwellings which fall under the ATED criteria.

You might also like to read our article, Why Is the Moyne Ramsay Ruling So Important?. This intriguing case centred on a property divided into ten separate flats for letting, raising the critical question: was this considered a business or an investment? The article explores the implications of the ruling and its significance for property owners and investors alike.

The Trust Registration Service (TRS) was created in 2017 as part of an EU Anti-Money-Laundering Directive (the 4th Money-Laundering Directive). Even though the UK has withdrawn from the European Union, as part of the Brexit withdrawal agreement, it was agreed that the TRS would be maintained. The idea is simple, to help combat money laundering, serious crime and the financing of terrorism. Consequently, all UK express trusts liable to pay tax in the UK were legally obliged to register.

New rules introduced on 6 October 2020

On 6 October 2020, as a consequence of the 5th Money-Laundering Directive, the rules dictating registration with the TRS were updated. The legal obligation for registration is now extended to cover the following:-

• All UK express trusts
• Non-UK express trusts
• Bare trusts
• Some complex estates

Before we look at the impact on property ownership and the TRS, it is essential to note there are still some trusts excluded from registration. These include:-

• Trusts imposed by statute
• Trusts created by court order
• UK registered pension trusts
• Trusts used to hold life, retirement or health policies
• Trusts used to hold insurance policy benefits
• Charitable trusts
• Pilot trusts holding no more than £100
• Will trusts
• Property co-ownership trusts, where the trustees and beneficiaries are the same
• Financial/commercial trusts set up in the course of professional services/business transactions
• Child bank accounts held in trust, holding cash but no investments
• Trusts holding funds for vulnerable people/bereaved minors
• Personal injury trusts

At first glance, the list of exemptions may seem complex but it is relatively straightforward. By removing relatively simple trusts in the equation, this allows the authorities to focus on larger more complex trust. As a result of the changes, non-exempt trusts in existence on or after 6 October 2020 are obliged to register with the TRS by the later of:-

• 1 September 2022
• 90 days from when registration is triggered

Now that we have established which trusts are covered and which are exempt, we will now take a look at the information required by the TRS.

Information required when registering a trust

To fulfil their legal obligations, trustees must provide the following information to the TRS:-

• Lead-trustee
• Co-trustees
• Settlor
• Beneficiaries

Initially, where a beneficiary is not named individually, perhaps part of a class group, their details will not be required. However, when they receive financial/non-financial benefits from the trust, and they are identifiable at this point, their identity will need to be revealed to the TRS.

How does the TRS impact property trusts?

In recent times, trust laws have been used to mask the underlying ownership of property and land. This was a prevalent method for overseas investors looking to acquire property in the London property market. The update to TRS rules will now force many trusts holding property to register with the TRS. However, it is crucial to recognise the distinction between the legal owner and the beneficial owner.

Legal owner

The legal owner is named on the title deeds at the land register and can make decisions regarding the asset.

Beneficial owner

The beneficial owner is the person(s) entitled to income from the property or proceeds from the sale.

While the legal owner(s) have the power to sell the property, a valid deed (signed by all parties) needs to be registered with the land registry. This is done using an accompanying Form B which adds a restriction over the title deeds. Consequently, the non-legal owner will be made aware if the property is being sold.

Practical examples involving property

Now that we have set the groundwork, we will look at some common scenarios involving trusts and property and whether they need to register with the TRS.

Property held for children under the age of 18

Schedule 1(2) of the Trusts of Land and Appointment of Trustees Act 1996 covers legal protection of property held by two or more persons where at least one is under the age of 18. In this scenario, the property must be kept in trust by those over 18 for the benefit of themselves and those under 18. As this is a trust imposed by legislation, it would be exempt from TRS registration.

Joint ownership of property

Where property is held in joint ownership between two or more people over 18, as a bare trust, it would typically need to be registered. However, if the trustees (the legal owners) and the beneficiaries are the same, this would fit the conditions for exclusion. Consequently, there is no obligation to register with the TRS.

Land Registry

There is a specific condition for exclusion where there are more than four joint owners and more than four beneficiaries. Under existing legislation, the Land Registry legal title for a property can only define up to 4 parties. So, if we assume there are five beneficial owners, but only four are mentioned on the legal title, this trust would be excluded from registration.

However, if only three of the five owners were mentioned on the legal title, this trust would need to be registered. This is because one of the beneficial owners is not mentioned on the legal title; therefore, there is no official note of their beneficial interest.

Keeping a record of beneficial ownership

The ongoing tightening of TRS regulations is a means by which the authorities hope to record the beneficial ownership of property and other assets. Initially, only those bare trusts with a tax obligation were legally required to register details with the TRS. However, the circumstances have now been extended to include an array of situations where there is no immediate tax liability. This will allow the authorities to monitor properties and assets where legal owners differ from beneficial ones.

Summary

There will no doubt be further additions to the TRS regulations to combat potential money laundering and the non-payment of taxes. Since its inception, the regulations have been tweaked and adjusted numerous times to exempt an array of traditional activities involving trusts. At the same time, they are recognising and bringing more complex trust arrangements within the remit of the TRS. By shining a light on the use of trust deeds to manage assets and tax liabilities, the authorities hope to reduce potential abuses of the system.

Sources:-

• https://townends.com/blog/trust-registration-service-co-ownership-of-land-and-property/
• https://www.lodders.co.uk/all-you-need-to-know-about-the-trust-registration-service/
• https://gateleyplc.com/insight/quick-reads/the-trust-registration-service-trs-an-overview-of-the-new-legislation-and-how-it-affects-property-transactions/
• https://townends.com/blog/trust-registration-service-co-ownership-of-land-and-property/
• https://albertgoodman.co.uk/insights/extension-to-the-requirement-to-register-a-trust-under-the-trust-registration-service

Annual Tax on Enveloped Dwellings

All companies (whether UK or not) holding UK residential property valued at over £500,000 are subject to the Annual Tax on Enveloped Dwellings (ATED).

The ATED year runs from 1 April to 31 March and companies must file an ATED return by 30 April for each ATED year during which they hold a UK residential property. If any reliefs are available then an ATED relief return must be submitted in order to claim them, if a relief does not apply then the company will be liable to pay an annual chargeable amount based on the value of the property at the most recent valuation date.

The ATED rules require a revaluation of existing property every five years.    The last revaluation date was 1 April 2017 or date of acquisition whichever is later.  Therefore, from 1 April 2023 the valuation date will change to 1 April 2022 or date of acquisition if later.

For the ATED return due for 2023/24 which is due for filing by 30 April 2023, all existing properties will be required to be revalued at 1 April 2022.  This could mean more properties are likely to breech the £500,000 limit and fall into the ATED regime for the first time.  There is the possibility that some properties have fallen in value and will therefore fall out of ATED regime, although this is likely to be rare.

Please note that any failure to file an ATED return, even if an ATED relief is claimed, penalties will be applied.

Annual Tax on Enveloped Dwellings –What do you need to do

1. Any residential properties within entities already claiming ATED reliefs (such as property developers or residential landlords) will not need to revalue the properties at 1 April 2022 provided the reliefs continue to apply.
2. Other entities with residential properties should review their portfolios and the individual values of any residential properties at 1 April 2022 to ensure that any ATED compliance matters are known well in advance and complied with.  Whilst the revaluation date does not kick in until 2023 it is advisable to obtain the valuation now.

While governments often wax lyrical about simplifying the UK taxation system, it only seems to get more complicated. Take the potential tax charge on selling a property and any resulting capital gains. You could understand different rates for personal and business transactions; surely that must be about it?

How many different rates of tax are there?

As you will see, the rate of tax charged on the sale of property ranges from 0% to 45%! To simplify a relatively complex subject, we will look at personal and business transactions separately.

Personal transactions

There are many different issues to consider concerning personal investment in residential and non-residential property. A further split between residents and non-residents of the UK makes the situation a little more complex.

Principal Private Residence

As the vast majority of homeowners in the UK only own one property, their principal residence, they will likely qualify for private residence relief. This means they will pay 0% tax on capital gains when selling their home. Aside from the primary residency condition, to qualify for the relief, there are other conditions:-

• No part of the property has been used exclusively for business purposes during the period of ownership
• The property, including gardens and grounds, is not greater than the permitted maximum area
• You have not been absent from the property, aside from allowed periods of absence, during the period of ownership

If a property were your principal residence for part of the ownership period, then any relief on capital gains tax would be prorated. After considering your capital gains tax allowance, any remaining gains are added to your taxable income. If you remain within the basic income tax band, you would be charged 18% on the taxable gain or 28% if you exceeded the basic income tax band.

Non-residential property

Non-residential property tends to cover assets such as plots of land, shops, factories and offices, i.e. properties where you would not normally reside. If the sale was carried out in a personal capacity, you could offset gains against your capital gains tax allowance. Any gain which exceeds this amount would be added to your taxable income. If this were within the basic income tax band, you would pay a flat 10% on the taxable gain, rising to 20% for those above the basic income tax band.

Non-resident, sale of UK residential property

The subject of non-residents and capital gains tax has prompted many controversial headlines over the years. Under the current tax system, non-residents won’t pay capital gains tax on most of their UK assets, such as shares. However, they are required to pay capital gains tax on property and land gains in the UK. If the property/land was held before 6 April 2015, the individual has the option to rebase the value to 5 April 2015.

Typically, a non-resident would be eligible for the standard capital gains tax allowance. Chargeable gains over the annual allowance are added to the individual’s taxable income. Combined income exceeding the basic income tax band would see the gains charged at 28%; those below the limit are charged at 18%. Any disposal must be reported to HMRC within 60 days of completion, regardless of any gain/loss, via the capital gains tax on UK property service.

Non-resident, UK non-residential property sales post-April 2019

In April 2019, the UK government extended the scope of capital gains tax to include all UK real estate and land, not just residential. We also saw new regulations covering what were deemed indirect property sales. This covers the sale of shares in property-rich companies which derive at least 75% of their value from UK land/ property (not trading assets). This subject is covered in more detail in the corporate section below.

Simplified tax rates for UK residents

As a UK resident, if you have a chargeable gain on a residential property, this would be added to your taxable income (less your capital gains tax allowance). If your combined taxable income does not exceed the basic rate tax band, you will be charged 18% on the gain. If the combined taxable income takes you above the basic rate tax band, you would be charged 28%. The rate for commercial property gains is less, at 10% and 20% respectively for the individual tax bands.

Corporate transactions

The situation regarding property tax is different again when transactions are carried out by corporate bodies. While less complex than taxation on personal property investment, it is vital to be aware of your obligations.

Limited company sale of residential property

Many investors have used limited companies to hold their buy to let assets in the private rental sector. In this situation, where the trading of properties is supplementary to the main business, gains on a property sale would be subject to corporation tax. This rate is currently 19% but is subject to change.

Company shares held by a non-resident taxpayer

In the past, some non-resident taxpayers in the UK have used corporate entities such as limited companies to shield property gains from capital gains tax. However, as we covered above, this has changed due to new legislation introduced in 2019. As a result, if a non-resident taxpayer owned at least 25% of shares in a property-rich company, deriving at least 75% of its value from non-trading UK property and land, any disposal would be considered an indirect property sale. While normally share sales for non-residents are free of capital gains tax, in this scenario any gains would be charged at a flat rate of 28%.

Property trader/developer

Usually, chargeable gains on property disposals would be added to your income, with rates of 18% for those who do not exceed the basic rate tax band and 28% for those who go above. However, the situation is different if an individual is deemed a property trader/developer. Unable to use the standard capital gains tax allowance, profits on property sales are classed as trading income. Consequently, for an additional rate taxpayer, this would mean a charge of 45%, a 17% increase on the usual capital gains tax rate!

Conclusion

As individuals and companies become more innovative in the structure of property investments, HMRC has introduced an array of new regulations. This has resulted in a range of capital gains tax rates on property, ranging from 0% to 45%. Recently, there has been much focus on non-resident investors and, in particular, treatment of both direct and indirect property gains. It is safe to say this is a fluid situation!