MHA | Tax changes for limited companies holding residential property

Tax changes for limited companies holding residential property

Joe Spencer · September 23rd 2021 · read

Tax Changes for LTD 5355 1632388932

On 1st April 2022 it will be ten years since the Annual Tax on Enveloped Dwellings (ATED) was introduced to remedy (or at least tax) the perceived distortion which could arise where residential property is held within a limited company (so sole traders and partnerships of individuals probably need read no further).

The tax is levied annually based on a scale value and the amount charged is increased each year broadly in line with inflation. Properties valued at less than £500,000 are not currently taxable, but those valued in excess of that figure are subject to a banded tax which starts at £3700 and runs to £237,400 for properties valued at over £20m. It is expected that these bands will be increased before next charge falls due.

Fortunately, there are a number of exemptions from the charge, primarily where the property is held as part of a rental or property trading business, is occupied by a (non-connected) employee or is a farmhouse.  Nonetheless, the reliefs are not given automatically and must be claimed annually, and the return must be made by 30th April during the year of charge – so the return for the year ending 31st March 2023 is due on 30th April 2022.

Most businesses owning valuable residential property will be familiar with the tax and its exemptions so should have a system in place to ensure the return is not overlooked. However, April 2022 will carry a sting in its tail. The legislation requires revaluations to be carried out on every fifth anniversary of the introduction of the tax, and although the position will vary from region to region, most rural property, particularly, will have risen in value steeply over that period (by over 25% in some areas).

The potential consequence of this is threefold:

  • Some businesses will have forgotten about the revaluation rules so will use the same figures as previously and under declare tax
  • Businesses owning property worth slightly less than £500,000 in 2017 or buying subsequently may be unaware of the tax and fail to submit a return on time (or at all). Even if an exemption applies, it needs to be claimed, and late submission will lead to a penalty
  • Some businesses which have slipped across a higher band may face a significant increase in tax. A property which has increased in value by 11% from £1.9m to £2.1m will see its tax charge (at current rates) rise by over 300% from £7,500 to £25,300

According to MHA Partner Joe Spencer

This is a serious issue. There are only seven months to identify the problems and, if necessary, organise the professional valuations.  A business will need to look at all residential property held in 2017 or subsequently acquired, and this could be quite a problem.  Valuers are not exactly short of work at the moment and with the Christmas break and potentially more winter Covid disruption, leaving it until spring could be too late.

Find out more

To discuss how this might impact your rural business, please complete our online enquiry form and a member of the team will be in touch. 

Share this article