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The Annual Tax on Enveloped Dwellings (ATED) is a tax charge on “Non Natural Persons” (NNPs). An NNP includes Limited Companies and therefore Flat Management Companies come within the definition of an NNP. The main purpose of the ATED legislation when it was introduced was to attack corporate vehicles being used to avoid Stamp Duty Land Tax on the disposal of a high value properties. This was perceived to be a particular problem with overseas investors using corporate structures to acquire high end London properties. When the tax was first introduced in 2013 the threshold value for high value property was £2,000,000. However, this threshold has been gradually reduced and from 1 April 2016 an annual tax charge of £3,500 applies to properties with a value of £500,000 or more. The legislation is complex with a number of exemptions and avoidance measures. There is also a strict filing and penalty regime associated with the tax. Given all these factors it is understandable why directors of Flat Management Companies may be concerned by ATED.

However, under normal circumstances a Flat Management Company should not be affected by ATED. This is because the company owns the freehold reversionary interest in the property and the not the bricks and mortar of the building. The freehold reversionary interest is the right of the company to re-acquire the freehold when the lease terms come to an end. As long as the leases for the flats are long leases then the value of the freehold reversionary interest should be small and way below the ATED thresholds for Flat Management Companies.

Other considerations for flat management companies

Short leases

If the remaining term on the leases of the flats is short then the value of the freehold reversionary interest will increase and for a block of flats where the remaining term on the leases are short there is a possibility that the value of the Freehold in the Company may exceed the ATED thresholds and the tax will need to be considered.

“Connected Parties” and “Aggregation”

There is anti-avoidance legislation designed to prevent “connected parties” avoiding the tax charge. The “connected parties” definition catches a situation where the freehold interest is owned by an NNP and the leasehold interest is owned by an individual connected to the company. In these circumstances the values of the two interests are aggregated when determining if the NNP exceeds the threshold for ATED. This is the situation for Flat Management Companies as the lessees are connected to the company as shareholders or members.

For Flat Management Companies, aggregation will only apply in the following circumstances,

a) If the aggregate value is more than £1,000,000 but less than £2,000,000 then the company’s interest must be worth more than £250,000 for aggregation to apply

b) If the aggregate value is more than £2,000,000 then the company’s interest must be worth more than £500,000 for aggregation to apply.

These concessions will keep most Flat Management Companies outside of ATED.

Conclusion

It would be against public policy for HMRC to raise a tax on ordinary households and it would be unfortunate if ATED resulted in a tax on Flat Management Companies. In most circumstances, Flat Management Companies should not need to consider ATED. However, if there is anything unusual about the circumstances of the company such as short leases, unusual voting structures or exceptional asset values then the directors of the company should consult their professional advisors to ensure they do not inadvertently find themselves within the scope of the tax.

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