Potential Penalties on Buy-to-Let Property Held by a Company

The Annual Tax on Enveloped Dwelling (ATED) rules, can result in significant penalties for companies that own residential buy-to-let property.  However, these penalties can be easily avoided providing certain compliance requirements are met.

Historically, high value residential property was often held within a company to help taxpayers avoid significant Stamp Duty Land Tax charges on purchase.  To put a stop to this loophole, the ATED rules were introduced by HMRC in April 2013.

The rules apply to residential properties held by “non-natural persons”, which include companies, partnerships and other investment vehicles.  Companies owning residential properties worth more than £500k, or which are acquired for more than £500k, may be caught.

Consequences of being in ATED

The consequences of ATED are:

• A 15% rate of SDLT will apply to the acquisition price
• An annual charge will be levied based on the value of the property (see table below)
• Gains on disposal are subject to CGT at 28%.

The ATED annual charge depends on the value of the residential property:

In addition to the annual charge, companies with residential properties can also be subject to capital gains tax at 28% on sale of the property.  This applies where the consideration exceeds the threshold of £500k, and the property was subject to the ATED but did not qualify for one of the exemptions or reliefs.  A partial charge to CGT can apply where an exemption or relief did not apply for the entire period of ownership by the company (for example if it was occupied by the shareholder for part of the period of ownership and then subsequently let out on commercial terms to a third party).

Exemptions and reliefs

However, there are a number of exemptions and reliefs to these rules:

• Charities and public bodies benefit from a full exemption
• Property rental, development and trading companies are relieved from the charges, but are not exempt from reporting requirements

For residential buy-to-let or residential property development companies, there should be no tax liabilities arising from ATED.  However, failure to meet strict compliance requirements can lead to stiff penalties.

Filing requirements

A return must be submitted to HMRC within 30 days of a company purchasing a residential property for more than £500k.  In addition, a company which owns residential properties worth more than £500k must also submit an annual return by 30 April in advance of each tax year (i.e. the return for the tax year ended 5^th April 2017 will be due by 30^th April 2016).

The potential penalties are:

• Late return = £100;
• Between 3 and 6 months late = £10 per day;
• More than 6 months late = £300 (or 5% of tax, whichever is greater); and
• More than 12 months late = £300 (or 5% of tax, whichever is greater).

Practical example

If a company bought a residential buy-to-let property for £600k on 31 August 2015, then it would need to file the initial return by 30 September 2015.  It’s first annual return would be due by 30 April 2016.  If it did not complete these forms until May 2016, then a penalty of £1,300 would apply to the first return, and a penalty of £100 would apply to the second return.

Unfortunately, even where there is no ATED tax charge due to one of the exemptions applying, HMRC have still sought to charge penalties for late filed returns.  There have been a number of tax cases confirming that penalties will be charged, so tax payers that own residential buy-to-let properties within a company should be wary of these new rules.

How we can help

If you own buy-to-let property within a company and are concerned about the impact of these rules, or think that you need to file an ATED return, please get in touch with your usual Shorts tax contact who will be happy to help.