Deadline Dash: Submit Your ATED Return Now

In the realm of property taxation in the United Kingdom, the Annual Tax on Enveloped Dwellings (ATED) regime is a significant consideration for property owners, particularly those who hold high-value residential properties within corporate structures. ATED is a tax levied on certain residential properties with a value in excess of £500,000 owned by companies, partnerships with corporate members, and collective investment schemes.

In this blog, we'll delve into the intricacies of ATED, exploring its purpose, applicability, rates, exemptions, compliance requirements, and potential implications for property owners.

Background to the regime

ATED was introduced by the UK government in 2013 as part of efforts to deter the holding of high-value residential properties through corporate structures, often perceived by HMRC to be for tax avoidance purposes. ATED is applicable to dwellings in the UK valued at over a certain threshold and owned by certain types of entities, primarily companies.

ATED applies to residential properties in the UK valued at £500,000. The value of the property for ATED purposes is determined based on its market value as of 1 April 2022, or the date of acquisition if later.

However, where there has been a substantial acquisition or disposal to said property (or part of the ‘dwelling’), this will result in a revaluation event for the purposes of ATED. Generally, an acquisition or disposal is considered ‘substantial’ if it is £40,000 or more.

What is the ATED Charge

The amount of ATED payable depends on the value of the property – the higher the property's value, the greater the annual tax charge. The current ATED bands and corresponding annual charges for the 2024/2025 tax year are as follows:

Taxable value of the propertyATED charge for tax year 2024/25
£500,001 to £1 million£4,400
£1,000,001 to £2 million£9,000
£2,000,001 to £5 million£30,550
£5,000,001 to £10 million£71,500
£10 million to £20 million£143,550
Over £20 million£287,500

What is a “dwelling”?

A "dwelling" refers to a residential property. Specifically, it includes any building or structure that is used or suitable for use as a single dwelling, or is in the process of being constructed or adapted for such use. This typically encompasses houses, apartments, and other residential accommodations where individuals live or could live.

A property is considered a dwelling if all or part of it is used, or could be used, as a residence. This also includes any gardens, grounds, and buildings within them.

Certain properties that are not classed as dwellings include hotels, guest houses, boarding school accommodation and hospitals.

Are there any exemptions?

Certain residential properties are exempt from ATED, including properties used for commercial purposes, properties open to the public for at least 28 days a year, and properties held as part of property development or trading businesses. Additionally, there are various reliefs available to mitigate or eliminate the ATED liability for qualifying properties, such as property rental businesses, properties held for charitable purposes, farmhouses and many more.

In our experience, the ATED charge generally applies where an individual is living in a residential property worth more than £500,000, where that property is owned by a company in their personal ownership. Clearly this is not the only scenario where it can apply, but this is the situation we see most frequently.

What action do I need to take?

Firstly, we would recommend that all companies undertake a review of their property portfolio to identify if any residential properties are held and if so what the value of those properties are. It is important to remember that when determining the value of the properties, you must consider the market value on 1 April 2022, not the acquisition cost (unless the property was bought after 1 April 2022).

If a company holds residential property that falls within the ATED regime they must register with HM Revenue and Customs (HMRC) and submit an annual ATED return, even if no tax is due as a result of the exemptions available! The deadline for ATED returns and payment of ATED is the 30th of April each year, with penalties imposed for late filing or payment. It’s important to note that unlike other self-assessment tax returns, ATED returns need to be completed in advance of the upcoming tax year! For property owners affected by ATED, compliance with the reporting requirements is crucial to avoid penalties.

HMRC’s website to submit your ATED return can be found HERE.

What to do if I buy a property in 2024-25?

If you acquire a property that falls within the scope of ATED in the 2024-25 tax year, you must file a return for this newly acquired property. This return must be submitted to HMRC within 30 days, or within 90 days for new builds.

Interaction with other taxes

In addition to being subject to ATED, company’s which purchase property worth more than £500,000 may be subject to additional stamp duty land tax charges. In some cases, this can be up to 15%.

Furthermore, HMRC will also levy surcharges on acquisitions of residential property by companies. Usually this is 3%.

However, there is also a 2% surcharge on residential properties in England and Northern Ireland bought by non-UK residents on or after 1 April 2021. The 2% surcharge applies on top of all other residential rates of SDLT including the 3% higher rate surcharge.

Summary

When looking at the acquisition of residential properties through a company, whilst there are many benefits to holding property in this way, the costs of acquisition can be expensive, and we would recommend seeking advice before completing any transaction.

Case Study

We had recently assisted a client who was unaware of the requirement to file an ATED return, despite qualifying for relief under employee occupation. HMRC contacted them, informing them of penalty fees for failing to submit an exemption claim for ATED for the years ended 31/03/2016 to 31/03/2022.

It is crucial to note you need to file an exemption claim by the 30/04 for the tax year ahead. If this return is more than 3 months late, HMRC will charge you will an additional penalty fee of £10 each day it remains outstanding for a maximum of 90 days.

Our client had to pay £9,100 for ATED late filing penalties all together.

Do not make a similar mistake!

Get in touch.

With the deadline quickly approaching, now is the ideal time to consult with our trusted tax advisors at PD Tax to ensure compliance and mitigate any potential penalties. Additionally, feel free to reach out if you require further details or wish to discuss eligibility for reliefs.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice.

Non-Dom No More: The End of the Remittance Basis for UK Non-Domiciliaries

As part of the UK's Spring Budget 2024, the Chancellor, Jeremy Hunt, announced the abolition of the remittance basis for income and capital gains tax for non-UK domiciled, UK resident individuals, with effect from 6 April 2025. HMRC have also since issued a technical note dated 7 March 2024 on the proposed abolition of the remittance basis of assessment, with effect from 6 April 2025.

What is the non-dom tax regime?

The non-dom regime has formed part of the UK’s tax system for over 200 years, dating back to when income tax was first introduced in 1799 by William Pitt to fund the Napoleonic Wars. Where the conditions are met, it has enabled UK resident individuals whose permanent home is outside the UK (“non-doms”) to benefit from the ‘remittance basis’, the fundamental principle of which is to exempt foreign income and gains from UK taxation unless remitted (brought back) to the UK.

Abolition of the Remittance Basis

Use of domicile status has been tapered away in recent years, with a 15-year ‘cap’ on the number of years a non-dom could benefit under the rules being introduced in 2017. However, from 6 April 2025, the remittance basis will be abolished for UK resident non-doms, marking a massive step towards a residency based, rather than domicile based, tax system.

The Replacement

From 6 April 2025, the remittance basis will be replaced with a new 4-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of 10 years of non-UK residence.

How does the FIG holiday work?

If someone is eligible for the FIG holiday, tax will not be chargeable on foreign income and gains arising in the first 4 years after they become UK resident. In contrast to the existing remittance basis regime, their foreign income and gains will be tax free whether or not they remitted to the UK. Individuals will also not pay tax on non-resident trust distributions.

UK tax on income and gains will be payable, as is the case currently for non-domiciled individuals.

For those who have been UK tax resident for less than 4 years (after 10 years of non-UK tax residence), the new regime will be available for any tax year of UK residence in the remainder of those 4 years.

Overseas Workday Relief

Overseas Workday Relief (OWR), for the first 3 years of UK residence, will remain the same. However, for 2025/26 onwards, eligibility for OWR will be based on an employee’s residency status and whether they opt to use the new 4-year FIG regime (as opposed to being based on an individual’s domicile status and whether they elect to use the remittance basis under the current rules).

Trust Protections

From 6 April 2025, the protection from income tax and CGT arising in settlor-interested trusts will no longer be available for non-doms and deemed-domiciled settlors who do not qualify for the 4-year FIG regime. For these individuals, tax will be charged on future foreign income and gains as they arise within the trust (whenever established).

Foreign income and gains arising in non-resident trusts from 6 April 2025 will be taxed on the settlor or transferor (if they have been UK resident for more than 4 tax years) on an arising basis (which is currently the case for UK domiciled settlors or transferors).

Foreign income or gains which arose in the trust before 6 April 2025 will be taxed on settlors or beneficiaries if they are matched to worldwide trust distributions or other benefits. Where the benefit is provided will not be relevant. Such income and gains should therefore be kept separate from income and gains which arise or are realised on and after 6 April 2025.

Beneficiaries and settlors who are within the 4-year FIG regime will also be able to receive benefits from 6 April 2025 free from any UK tax charged whether or not the benefits are received in the UK.

Non-Dom Inheritance Tax

Broadly speaking, there seems to be an intention to also move inheritance tax (IHT) to a more residency-based system from 6 April 2025, however nothing has been confirmed and there will be a period of consultation before this.

Given the other changes, it’s reasonable to predict that IHT may be charged on individuals who have been UK resident for 10 years, and individuals who have left the UK may still fall within the scope of IHT for 10 years of non-residency.

As is the case now, UK situs assets will remain within the scope of IHT.

Non-UK assets held by non-UK trusts which benefit from ‘excluded property’ status are currently expected to remain outside the scope of IHT.

Transitional Relief

For those who:

  1. Currently have non-dom status;
  2. Move from the remittance basis to the arising basis; and
  3. Are not eligible for the new 4-year FIG regime.

Transitional relief will be available for 2025/26 only and these individuals will pay tax on 50% of their foreign income. This applies to foreign income only and there are separate rules for chargeable gains.

Rebasing

For individuals who have claimed the remittance basis and remain neither UK domiciled nor deemed domiciled, capital gains tax rebasing of non-UK sited assets (held on 5 April 2019) will be available.

The changes seem to signify a clear intention to move away from a domicile-based system to a residency-based one, thus ensuring those that are considered to be UK resident under the statutory residency test are subject to UK income, capital gains, and inheritance tax on more of their foreign income/gains. If you would like any further information regarding domicile, the remittance basis, or the changes announced in the Spring Budget, please do not hesitate to contact a member of our team today.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice.

‘Tis the Season to Gift: Reducing Inheritance Tax on Financial Gifts

The holiday season is a time of giving, and what better way to express your love and generosity than by gifting financial presents to your loved one this Christmas. Gifting to children or grandchildren this Christmas could be a tax-efficient way to help them pay university tuition, pay off student loans or even get them on the property ladder. Along with the pleasure of seeing your loved ones enjoy your gifts, you can also reduce the Inheritance tax liability (IHT) of your estate.

IHT is a tax levied on the valuation of an individual’s estate following their death, with the standard rate of tax being 40% on anything over £325,000. However, through careful planning, calculating how much is affordable to gift and obtaining specialist advice, there are plenty of ways you can minimise this tax burden whilst still spreading the Christmas cheer. The best ways to give financially this Christmas include gifting from surplus income, bare trusts and utilising the annual and small gifts exemptions.

A gift, simply put, is anything that is part of your estate (i.e., property, investments, money, or personal possessions). One thing to remember, is that you cannot add conditions to your gifts. For example, if you were to gift a property, you cannot continue to live in that property rent-free or the gift with reservation of benefit rules will apply.

Begin giving early! As soon as you give a gift (that does not benefit from any of the exemptions), an IHT clock starts ticking. Seven years must pass before your gift becomes 100% IHT free and falls outside of your estate. If unfortunately, you were to die before the 7 years expire, your beneficiary may be required to pay IHT. However, they could be eligible for a sliding scale of ‘taper relief’ which progressively reduces the rate of IHT on gifts between 3 and 7 years.

Ways to Gift this Christmas

1. One of the simplest ways to reduce IHT is to take advantage of the annual exemption. Everyone can make gifts up to £3,000 per year without any IHT being payable. If it is unused one year, this allowance can even be brought forward by a year, allowing you to gift up to £6,000 in a single year. It can be a good idea to make the most of this opportunity and give gifts up to the value of the annual exemption regularly.

2. In addition to this annual gift allowance, the UK has a small gift exemption, which means you can also give as many gifts as you like up to £250 per person. These gifts are also completely IHT free, meaning you have no 7-year clock ticking. Consequently, this method of gifting is a great way to spread the holiday cheer to friends or extended family without the worry of IHT.

However, it is important to note that you cannot combine this small gift exemption with your annual exemption when gifting to the same person (i.e., you cannot give someone a gift of £250 if you have already given them your annual gift allowance of £3,000, or IHT may apply).

3. If you have a Christmas wedding coming up, it is possible to gift a tax-free gift to the couple getting married, but the amount you are able to give depends on your relationship to the couple. You can gift up to £5,000 to a child, £2,500 for grandchildren or great-grandchild, or £1,000 to relatives or friends.

4. Donations to UK charities, political parties and community amateur sports clubs can go a long way around Christmas time, and by leaving 10% or more of your estate in your Will to one of these groups ensures that the IHT rate chargeable on the value of your estate at death drops to 36%.

5. Setting up trusts can also be a tax-efficient way to gift money during Christmas. There are various types of trusts available, and they offer different tax advantages. Bare trusts, however, have no investment limits and money can be contributed by grandparents and used by grandchildren. Money within the bare trust is taxed as if it is held by a child, utilising their annual allowances, and regular contributions by grandparents from surplus income are exempt from IHT.

Considerations when Gifting

When gifting, it is very important that you record and track the details of any gifts you have made. This will include who each gift was given to, what type of gift it was, the date it was given and the value of the gift. By keeping this information, you ensure that eligible gifts will fall outside your estate, thus making it easier to establish if there is any IHT due.

IHT tax planning is a complex area, and navigating the complexities of the law can be challenging. It is important to carefully manage your estate and consider the gifts you can afford to make. If you would like any further information regarding IHT planning please do not hesitate to contact a member of our team today.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice.

EMI Share Schemes Explained

What is an EMI Share Scheme?

An Enterprise Management Incentive (EMI) share scheme is a government-approved scheme, introduced in 2000, which allows growing companies to attract and/or retain talented employees in a tax efficient manner.

Some of the key benefits of an EMI share scheme include:

The concept of an EMI share scheme is that companies grant the employee share options, i.e. the legal right to purchase a company’s shares within a specified period at a fixed price and subject to various conditions, such as performance or on a sale of the business. Therefore, if the company’s value increases over time, the employee could realise a substantial profit, thus incentivising them to join/remain with the company.

Recent HMRC statistics show that more than 14,000 companies use an EMI as part of their equity compensation strategy, demonstrating this is a well-trodden and acceptable route for incentivising employees.

Illustration

The illustration below exemplifies the tax benefits of an EMI scheme to both employer and employee:

Angela was granted EMI share options in Pear Ltd on 1 April 2019 which stipulated she could buy up to 1,000 shares at £1 per share over the next 10 years. There are no tax implications for Pear Ltd or Angela on the grant of the options.

Four years later, Pear Ltd has had a very successful few years, and the share price has risen to £5 per share. As a result, Angela decides this is the opportune time to exercise her options, so she buys the full allocation of 1,000 shares at a total cost of £1,000.

At the time of exercise, the shares are worth £5,000 (1,000 at £5 each) yet Angela has only paid £1,000. However, the increase in market value of the shares between the date of grant and the date of exercise is exempted by the EMI scheme. Consequently, Angela has no tax liability on the exercise of the option.

As Pear Ltd issued shares at less than market value, it is entitled to a corporation tax deduction on the difference between the market value and price paid, i.e., £4,000 at 25%, resulting in a tax saving of £1,000 for the company.

Finally, if Angela decides to sell her shares in Pear Ltd in 2023, she will realise a capital gain of £4,000 based on the current valuation of £5,000 which will be taxable at either 10% or 20% depending on her marginal rate of tax and whether she qualifies for Business Asset Disposal Relief.

 EmployeeEmployer
Grant of optionsNo tax implications.No tax implications.
Exercise of optionsMust pay the exercise price agreed. No further tax implications.Corporation tax deduction available on the difference between the market value of the shares and the exercise price agreed.
Sale of sharesCapital gains tax payable. (Care needed if options are acquired at less than market value, as income tax may be payable.)No tax implications.

As illustrated above, the commercial and tax benefits of an approved EMI share option scheme are substantial. However, as always, it is critical to ensure that tax advice is sought on the implementation and ongoing reporting of the scheme to guarantee that the qualifying conditions are being and continue to be met.

What are the EMI Qualifying Conditions?

There are certain qualifying conditions that must be met by the company for an EMI scheme to be implemented. Broadly, these are:

There are also specific qualifying conditions that need to be met by the employee if EMI options are to be granted to them. Broadly, these are:

Disqualifying Events for an EMI

Often, companies implement EMI share options but then do not ensure they continue to meet the qualifying criteria for relief detailed above. It is important that these criteria are reviewed on a regular basis and that the annual reporting to HMRC is completed to retain the share scheme’s approved status with HMRC. Failure to do so will result in the tax advantaged status of the EMI scheme being lost.

We recommend that a review of the company’s qualifying status is undertaken on a regular basis. Key areas where approval status is often lost include:

When a disqualifying event occurs, a participant’s options can be exercised within 90 days and still be treated as EMI options. If exercised within this timeframe, all favourable tax treatments will be retained, such as the employees not needing to pay income tax when exercising their options at the pre-agreed market value.

As such, if, for example, a reorganisation of the company structure is being implemented, then it will be critical that advice is obtained to ensure that the EMI share scheme continues to qualify for relief with HMRC.

Next Steps

If setting up an EMI scheme sounds like something you are interested in understanding further, it is important that you obtain full, comprehensive advice. We would be happy to schedule an initial call with one of our experienced tax consultants to discuss your options.

If you are interested but concerned you may not qualify for an EMI share scheme, don’t worry - if you do not qualify for an EMI share scheme, other options are available such as unapproved share schemes or growth shares.

If you have any queries on any of the information in this article, or need help with regards to EMIs, please do not hesitate to contact a member of the team to see how we can help.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before taking steps to utilise an EMI within your own company.