Pushing the envelope

01 May 2013 Chris Williams

Pushing the envelope

Chris Williams considers the new UK property taxes and explains why high-value property owners should think carefully before de-enveloping.

People who use UK or offshore intermediary structures to hold residential property valued at over GBP2 million (‘high-value residential properties’) face two new forms of tax:

  • Since 1 April 2013 the new annual tax on enveloped dwellings (ATED) applies to high-value residential properties owned by certain non-natural persons (NNPs – see below).
  • Since 6 April 2013 ATED-related capital gains tax (CGT) applies to certain NNPs that dispose of a high-value residential property or the envelope in which it is held.

The ATED will be payable by an NNP, defined as a:

  • company;
  • partnership, one or more of whose members is a company; or
  • collective investment scheme, as defined by s235 of the Financial Services and Markets Act 2000.

That definition is clearly intended to restrict ATED to corporate-based structures and does not include trusts other than unit trusts, which are collective investment schemes.

An NNP owning a residential property (a ‘single dwelling interest’, or SDI) valued at more than GBP2 million on 1 April 2013 will have to make an ATED return no later than 1 October 2013 for the year beginning on 1 April 2013. This article outlines the key facts about the ATED and the ATED-related CGT charge, and considers the pros and cons of de-enveloping affected property.

Basic facts about ATED

ATED is based on bands of value. The 2013-14 proposed charges are shown in the table below.

Property value Annual charge % charge
GBP2 million–GBP5 million GBP15,000 0.30%–0.75%
GBP5 million–GBP10 million GBP35,000 0.35%–0.70%
GBP10 million–GBP20 million GBP70,000 0.35%–0.70%
GBP20 million and above GBP140,000 Up to 0.70%


The tax is calculated on a dwelling-by-dwelling basis, so, for example:

  1. A UK company owning two adjacent flats, each worth GBP1.5 million, has no liability to ATED; and
  2. A company owning two properties, one worth GBP3.5 million and the other worth GBP7 million, must pay GBP15,000 on the first and GBP35,000 on the second.

The annual charge is reduced pro rata for periods of the year in which the property is not owned or in which an exemption applies.

Trustees are not liable for ATED. This includes corporate trustees. However, where a company holds the legal title on trust for an individual beneficial owner, the beneficial owner will be the person liable for ATED. This will catch UK residents who have used corporate nominees to acquire property.

ATED returns and payments

ATED will be a self-assessed tax for which the first returns, for 2013-14, will be due on 1 October 2013, with the tax due and payable by 31 October 2013. A separate return will be needed for each SDI.

Thereafter, an annual return and payment will be required for each relevant property by 30 April in the year of charge. So, for the return period 1 April 2014 to 31 March 2015, the return and tax payment needs to be made by 30 April 2014.

Where a new property is acquired, a return will be due within 30 days of acquisition, except for new-build properties, where the time limit is extended to 90 days to allow time for the property to be valued.


There are exemptions for:

  • property development, rental or trading businesses;
  • accommodation provided to an employee, office holder or partner who, broadly, does not own more than 5 per cent of the company or partnership;
  • charities;
  • farmhouses;
  • diplomatic or publicly owned properties, or those that are conditionally exempt from inheritance tax.

Property businesses cannot claim exemption where the residence is provided to a connected person. Exemption must be claimed on a return, and failure to make a return will be subject to penalties.

ATED-related CGT

CGT will apply to corporate entities that are also liable to the ATED.

ATED-related CGT applies to any person who is liable for the ATED who is not an ‘excluded person’. The draft new s2B of the Taxation of Chargeable Gains Act 1992 (TCGA) excludes individuals, trustees who are members of partnerships and personal representatives of deceased members of the partnership. If a property is subject to ATED for part of the company’s period of ownership after 5 April 2013, the gain will be apportioned between the periods in which ATED did and did not apply, and charged to ATED-related CGT and corporation tax (CT) respectively.

Only or main residence relief under s222 TCGA will not apply to ATED-related CGT because that relief applies to individuals and trustees, not companies.

Problems facing existing structures

Owners of existing structures need to consider whether they should ‘de-envelope’ their properties and, if so, what the consequences will be. I offer two examples that illustrate the nature of the problem.

Example 1: Bradley

Bradley formed a UK-registered company, entirely funded by share capital, in 2008 to buy his holiday home for GBP2.5 million; it is now worth GBP2.7 million. The sole reason for the company was to enable Bradley to realise a higher price by selling the company with the property enveloped in it so the sale would not be liable for stamp duty land tax (SDLT). The potential benefit of that arrangement must now be weighed against the additional cost represented by ATED and the possible reduction in value of the company, as ATED would also represent a cost to the buyer (SDLT at 7 per cent on the purchase of residential property for GBP2.7 million would be GBP189,000).

The costs of de-enveloping would include legal fees, CT on any gain, the cost of winding up the company and possibly CGT on the realisation of the company’s shares. Bradley would not have to pay SDLT on a distribution of the property itself in a winding up.

The company would have a CT liability of less than GBP48,000 after deducting costs of acquisition and disposal, while Bradley would be unlikely to realise anything other than a loss on his shares.

The cost of a members’ voluntary winding up and the associated legal fees relating to the transfer of the property should be less than one year’s ATED. The cost of putting the property into Bradley’s personal ownership may be less than the continuing cost of ATED and the company’s eventual ATED-related 28 per cent CGT liability on increases in value from 6 April 2013, but there is no definitive answer because so much depends on Bradley’s intentions. He might decide not to de-envelope the property but to cease to use it and instead rent it out: if the property is commercially let to unconnected persons ATED will not apply, nor will ATED-related CGT.

Example 2: Hervé

Hervé, who is deemed UK-domiciled due to residence, owns a London flat through a non-UK company held under a Jersey-resident trust. The flat was bought in the mid-1980s for GBP250,000 and is now valued at GBP5.2 million. The company is potentially liable for ATED and, when it is sold, ATED-related CGT; none of the exemptions apply. The company’s annual ATED charge will be GBP35,000 unless it de-envelopes the property.

Inheritance tax (IHT) may be a major consideration here; if the property became part of Hervé’s IHT estate the potential charge on death would be GBP2,080,000, whereas ATED annually is GBP35,000. But UK IHT is not the sole consideration, as death duty in Hervé’s country of natural domicile may also apply and must be taken into account.

De-enveloping would involve the company realising a gain and distributing the property, at least to the trust. A gain made by the trust would be imputed to Hervé under s87 TCGA on the basis of the benefit he derives from the use of the property. De-enveloping by way of dividend distribution would create income on which Hervé would be chargeable under the transfer of assets abroad provisions of the Income Tax Act 2007, Part 13, Chapter 2 (s714 to s751). Being non-domiciled would be of little help to Hervé because the subject matter of the distribution is situated in the UK, as is the property representing the gain.

Again, much will depend on Hervé’s intentions. If he intends to leave the UK permanently at any point, the least costly option may be to accept the ATED and the eventual CGT charge on the increase in value. He would need to leave the UK for five years’ unbroken overseas residence to be able to de-envelope the property entirely free from UK tax; he could de-envelope immediately after departure, but the rules imputing gains made in temporary periods of overseas residence under s10A TCGA and the proposed charge on income realised in such periods (due to be introduced in Finance Bill 2013) mean he could not return within five years without facing tax as a result of the de-enveloping.

If he has no intention of leaving the UK, it may be that, for as long as he wished to enjoy the property, the ATED is the least detrimental option, given that it preserves his IHT advantage.


The major obstacles to de-enveloping any property will be crystallisation of gains that have already accrued and potential loss of the ability to shield the property from CGT and IHT in the future. The relative costs will have to be compared and a decision taken as to whether the costs of de-enveloping are justified by the longer-term savings. It is more important to weigh all the options and consider the consequences than to rush to de-envelope properties, as the cost of part of a year’s ATED may not be excessive even if the ultimate decision is to de-envelope.


Chris Williams

CPD Reflective Learning