Another tax hurdle for residential property

Is your residential investment owned by a limited company? If so, it’s important to factor in the tax implications.

Although there’s no problem with using a limited company to purchase property to let, you need to be on guard as an investor. When the ‘Annual Tax on Enveloped Dwellings’ (ATED) was first introduced in 2012, it only applied to properties worth more than £2 million, but now it’s kicking in on homes with a value of just £500,000.

So what is ATED?

If the property owned by your limited company is valued at between £500k and £1m, you will need to pay £3,500 in tax if it remains empty or is rented out to someone in your family or another ‘linked person’.  The fee increases in incremental bands with the value of the property. So, a £1-2m house would attract a fee of £7,050, while a £20m mansion would set you back a massive £220,350.

What if the home is rented out privately?

No ATED is payable if you have private tenants, but you still have to file a return with HM Revenue & Customs or you can face a fine.

Will the reach of ATED extend over time?

Possibly yes. The current taxes are based on 2012 property valuations, but this will change from April 2018 when the value of the property at 1 April 2017 will be the deciding factor until there is another change in the valuation criteria. As a result, properties that are currently excluded may fall within the first ATED band and others might be liable for higher charges.

What other risks are involved?

If you don’t pay your ATED or file a return, you could face a fine of £100 for being just a day late or up to £700 for being more than a year behind. HMRC can also make an extra levy of up to 100% of the tax charge.