Getting property out of the ATED regime

Fixed charge

The annual tax on enveloped dwellings (ATED) is a fixed charge, the level of which depends on the valuation band your client’s property falls into. There are fixed compulsory revaluation dates every five years, the most recent being 1 April 2022. One problem with the fixed nature of the ATED is that a relatively small increase in value can significantly increase the charge.

Example. Acom owns property subject to the ATED that it acquired in April 2021 for £1.95m. Its ATED charges for 2021/22 and 2022/23 were £7,500 and £7,700 respectively. However, at the revaluation date on 1 April 2022, the property is valued at £2.05m. At current rates, the charge would be £26,050 (this is likely to increase for 2023/24). The value of the property has increased by 2.8%, but the ATED charge will increase by nearly 240%.

Your client is the sole shareholder of the company, and wishes to transfer the property out into his personal ownership to avoid paying an increased charge in perpetuity. What are the options?

Sale at market value

The simplest option is for the shareholder to buy the property from the company at its market value. The problem is that ultimately this is an expensive route. The money has to be raised by your client, either out of already taxed income or personal borrowings. Stamp duty land tax (SDLT) will also be payable. Getting the money back out of the company will bring further income tax charges. Corporation tax (CT) will be also payable as the property is standing at a gain.

Sale at undervalue?

If your client wants to buy the property, but cannot afford (or does not wish to pay) the full price, they could agree a lower cash price with the company.

Pro advice. This will not reduce any SDLT, as it will be based on the full market value.

The difference between the actual amount paid and the market value will be taxed as income in the hands of the shareholder.

Pro advice. This would be taxed as a distribution, i.e. at the dividend tax rates, or as a benefit in kind if the shareholder is an employee or officer.

The only real advantage here is that the shareholder will need to find less upfront cash to fund the purchase.

It would be possible to avoid the income tax charge by setting the purchase at market value, but spreading the payments. However, the outstanding balance would be subject to the temporary s.455 CT charge at 33.75% - which could cause cash-flow issues. But there is a further option.

Avoiding the SDLT

A more efficient alternative would be to structure the transfer as a distribution in kind, as this will negate the SDLT charge. While the s.455 charge, or if applicable the benefit in kind, cannot be avoided, the overall tax cost will be reduced.