ATED – Further problems for Limited companies

 In Tax

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The ideal trading structures for various businesses, including farms, has been given much consideration over the decades. For various historic reasons, some farm enterprises are owned by limited companies which often includes some ownership of residential property, eg a farmhouse and farmworkers’ cottages in some agricultural businesses. This can result in a multitude of problems, not least the now wide-ranging ATED charge and the need to submit the relevant claim forms.

ATED

The law

Since 1 April 2013, non-natural persons (“NNPs”) holding UK residential property that was valued at more than £2 million on 1 April 2012 have been liable to pay a new Annual Tax on Enveloped Dwellings (“ATED”).

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The Finance Act 2014 has extended ATED over the next two years to apply to residential properties owned by NNPs (a limited company that owns a farming operation) valued at above £500,000. For ATED particularly, two new taxable bands have been created:

  • Residential properties worth more than £1 million but less than £2 million will fall within ATED from 1 April 2015 (the annual charge will be £7,000); and
  • Residential properties worth more than £500,000 but less than £1 million will fall within ATED from 1 April 2016 (the annual charge will be £3,500).

Owning farms via a company

Within the agricultural market sector, there is the complex issue that farming operations owned in a limited company do not achieve Agricultural Property Relief for Inheritance Tax on minority shareholdings, ie shareholdings that do not control the company. It would therefore appear that it is essential to review all properties held within a farming limited company, to ensure both tax efficiency and compliance are achieved.

Farming companies which may be affected by the extension to the ATED charge must consider the availability of various reliefs. There is a specific relief (calculated on a daily basis) available in respect of farmhouses occupied for the purposes of a farming trade if the farmhouse forms part of land occupied for the purposes of a farming trade carried on commercially with a view to profit.

A ‘relievable’ day for the purposes of ATED is defined as a day that the farmhouse is occupied by either:

  • A farmworker (that is, an individual substantially involved in the day-to-day work of the trade, or the direction and control or its conduct) occupying for the purposes of the trade; or
  • A former long-serving farmworker (an individual who previously had been a farmworker for a period of three years or more or periods totalling three years or more in a five year period) or the surviving spouse or civil partner of such a worker.

Substantial involvement in the day-to-day work, or the direction and control of the conduct of the farming trade equates to spending 20 hours a week (on average) throughout the year on those activities.

This emphasises the need to keep a diary. The relief is primarily concerned with the time spent by a specific individual; this does not include the time spent by a group of individuals occupying the farmhouse. As the legislation applies to single dwellings, it is necessary to look at the position on joint property. Occupation of part of the dwelling is to be regarded as occupying the whole of the dwelling for establishing the extent of the relief. That is to say that where only part of a single-dwelling interest is occupied for purposes that would qualify for farmhouse relief then the whole interest will be treated as qualifying going forward.

As many advisers omit to record the P11D charge for directors who live in farmhouses owned by the limited company, this could be a “wake up” call for a thorough review of property held in the limited company.

13 July 2015

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