Although most residential property in the UK is owned directly by individuals in some cases the property is owned by a company or other corporate structure. The property can then be said to be enveloped in a corporate wrapper. Until 1 April 2013 properties in a corporate envelope could be sold through transferring the shares in the company. These transactions were not subject to the normal rate of Stamp Duty Land Tax or Capital Gains Tax.
The Annual Tax on Enveloped Dwellings (ATED) was introduced with effect from 1 April 2013 as a Stamp Duty Land Tax (SDLT) anti-avoidance measure. The tax is payable by “non-natural persons” that own UK residential property. The person owning the property could be a company, a partnership with a corporate member or a collective investment scheme. The tax takes the form of an annual charge on enveloped properties, the charge increasing according to the band within which the value of the property lies.
In addition to the ATED the UK introduced a 15% rate of SDLT on the purchase of properties into an envelope. Also the amount of capital gains tax payable when de-enveloping a property would be 28% on any gain on the property since 1 April 2013.
Research into the effect of the tax on the behavior of taxpayers was conducted by forty in-depth interviews with individuals owning enveloped properties and with representatives or agents of companies that own or manage property envelopes. The research aimed to find the reasons why properties are held in envelopes and to assess the impact of the ATED legislation and the behavioral response of taxpayers to any future changes in the legislation.
The research report indicates that ATED has successfully discouraged the enveloping of properties and that agents are no longer advising clients to envelop properties. Where a property envelope already exists, however, not many taxpayers are dismantling the arrangement. They consider that it is preferable to pay the ATED rate while retaining the benefits of the envelope such as privacy protection and Inheritance Tax (IHT) advantages. There is also uncertainty about the future course of tax changes that makes people prefer to retain the existing arrangements, while the perceived costs of de-enveloping, for example possible capital gains tax, were also a factor in retaining the envelope.
Although the ATED legislation was introduced as part of SDLT anti-avoidance measures the avoidance of SDLT was not mentioned as a main reason for enveloping properties. In addition to privacy protection and IHT some people mentioned property protection as a reason. In some cases the property had been enveloped by another person and the original reasons were not known.
In the few cases where taxpayers had de-enveloped property the reasons given included that the owner of the envelope could not afford or did not want to pay the ATED. These were generally asset rich but cash poor individuals and the property had most likely been originally enveloped by another person. In a few cases where the owner of the envelope was relatively young there was less concern about inheritance tax and more concern about continuing to pay the ATED into the future.
Owners of envelopes, agents and company representatives considered that as a result of ATED few people would envelop properties in future but alternative structures such as trusts would be used. Agents had advised some people to hold their property personally as the simplest option. Some people who planned to rent the property would still envelope in the future as commercial use of the property qualifies for ATED relief.
The research shows that the cost of ATED is not sufficient to encourage existing owners of enveloped properties to de-envelope. There might however be a tipping point in the future where the cost of ATED becomes too much and de-enveloping is more likely.