What Are the Tax Ramifications on Buy-to-Let Properties?

Wherever in the world you purchase or own buy-to-let properties there are tax consequences, and the UK is no exception.

In the UK, you can avoid tax penalties on buy-to-let properties by complying with the rules of the Annual Tax on Enveloped Dwellings (ATED). Property accountants and experts Alexander & Co are here to explain those rules.

ATED Guidance

In the past, companies often held high value residential properties within the company to help avoid hefty Stamp Duty Land Tax (SDLT) charges on purchases. To prevent this loophole, the UK government introduced ATED rules in April 2013.

The rules apply to residential properties held by “non-natural persons,” which include partnerships, companies and other investment vehicles. Companies which have acquired residential properties for more £500k, or which own residential properties worth more than £500k, may be included in this definition. Naturally, this rule includes buy-to-let properties.

What Are the Consequences of Being in ATED?

Consequences of ATED include:

A 15% Stamp Duty Land Tax will apply to the acquisition price.
The UK government will impose an annual charge based on the property’s value.
Gains on disposal are subject to Capital Gains Tax (CGT) at 28%.

From the GOV.UK website, the ATED annual charge depends on the value of the residential property. Here are the annual charges:

Property Value	Annual Charge
More than £500,000 but not more than £1 million	£3,500
More than £1 million but not more than £2 million	£7,050
More than £2 million but not more than £5 million	£23,550
More than £5 million but not more than £10 million	£54,950
More than £10 million but not more than £20 million	£110,100
More than £20 million	£220,350

On top of the annual charge, companies with residential buy-to-let properties can also be subject to Capital Gains Tax at 28% on the sale of the property. This applies where the value 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 Capital Gains Tax can apply in some cases. For example, this would be true if a shareholder occupied the residential property for some portion of the period of ownership, after which the property was then let out on commercial terms.

Exemptions and Reliefs

There are a number of exemptions and reliefs to these rules:

Development and trading as well as property rental companies are relieved from the charges. However, they are not exempt from reporting requirements.
Charities and public bodies benefit from a full exemption.
For residential buy-to-let or residential property development companies, there should be no tax liabilities arising from ATED. However, failure to comply with the guidelines can lead to strict penalties.

Filing Requirements

A company must submit a return to the UK’s Revenue and Customs department within 30 days of 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. For example, the return for the tax year ended 5th April 2018 will be due by 30th April 2017.

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).

There have been many cases confirming these charges, so make sure you are wary of the new rules.

Next Steps

If you think you need to file an ATED return, or if you are concerned about the new rules, make sure you get in touch with expert property accountants such as Alexander & Co.