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Are you enveloped? Changes to the way rental income is taxed

The recent change to the way rental income is taxed, and in particular the restriction in loan interest relief, has led many property investors to consider incorporation as a way to reduce the tax burden.

You may be wondering what the envelope connection is at this point. Where a UK residential property is held within a company it is termed as an ‘enveloped dwelling’. If the value of the property is more than £500,000, an Annual Tax on Enveloped Dwellings (ATED) charge applies. A relief from the charge is given if the property is let, but this relief must be claimed. Although ATED is more normally connected with overseas companies, it applies to UK companies too.

Even where the relief is claimed, if that relief return is submitted late, a late filing penalty will apply. The filing date is 30 April in any given tax year, so for the current tax year 2017/18 the filing deadline was 30 April 2017.

Whilst this could catch unsuspecting incorporated residential property investors, another danger lurks around the corner. The threshold of £500,000 at which ATED applies is currently based on the property’s value at 31 March 2012 or acquisition date if later. However, for the return for 2018/19, due 30 April 2018, the valuation date has been rebased to 31 March 2017. If the property value has increased, an ATED return may be required this coming April.

 Published: 18 January 2018

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January 2018

Key Contact

Liz Beadsley