Anticipating the ATED extension

Wed 02 Jul 2014

Following the 2014 Budget the ATED threshold is to be reduced to:

• £1m (£7k charge on properties £1m to £2m) from 1 April 2015; and
• £500k (£3.5k charge on properties £500k to £1m) from 1 April 2016.

These changes increase substantially the number of situations ATED will affect, including those where reliefs apply.

De-enveloping: the obvious solution?

Individuals will now less frequently see a benefit in putting residential properties into the ownership of non-natural persons (usually companies).  Those with residential property which is already ‘enveloped’ may contemplate the possibility of de-enveloping.  There are a number of potential costs and benefits to doing this and advice should always be sought first.

Pros of de-enveloping

• saves ATED;
• avoids 28% ATED-related capital gains tax (ARCGT) on future gains (instead of the lower 20% corporation tax rate);
• reduces compliance costs.

Cons of de-enveloping

May immediately incur tax costs including:

• SDLT (e.g. where consideration is provided -including in some cases the discharge of debt);
• corporation tax on chargeable gain;
• income tax on distribution;
• CGT on winding up the company;
• taxable remittance by non-UK domiciles; or
• receipts by beneficiaries under transfer of assets abroad rules.

For some, ATED may be a price worth paying, however reluctantly, because the benefits can outweigh the costs. This will especially be the case where the individual who ‘owns’ the property:

• is non-UK domiciled and the ‘envelope’ keeps the property beyond the reach of UK inheritance tax; or
• expects to become non-UK resident and so able to de-envelope at lower cost so that the intervening ATED and any eventual ARCGT  are acceptable.

However, the best solution will depend on individual facts and circumstances.  For more information or help please contact Matt.Scott-Pearce@mazars.co.uk.