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Shifting sands – the UK Revenue’s new approach to UK property ownership through enveloping

News and ViewsPublicationsShifting sands – the UK Revenue’s new approach to UK property ownership through enveloping

This article appeared in the 2014 edition of The International Comparative Legal Guide to: Private Client, published by Global Legal Group Ltd, London (www.iclg.co.uk).


Historically it has been a usual practice for wealthy individuals from outside the UK to purchase residential property in the UK, particularly in London, through companies. This practice has become known as ‘enveloping’. In March 2012 the UK Government announced a raft of new tax changes aimed at high value enveloped properties and, after a period of consultation and amendment, these new rules were finalised in the Finance Act 2013 and are now in force.

The package of measures aimed at enveloped properties has three distinct parts. The Annual Tax on Enveloped Dwellings (ATED) is an annual tax imposed on residential property which is worth more than £2m and ‘enveloped’ in a company or other Non-Natural Person (NNP) with effect from 1 April 2013. At the same time, other more familiar taxes have been modified. A Capital Gains Tax (CGT) charge is now imposed on gains realised after 6 April 2013 on the sale of properties subject to the ATED charge and a 15% Stamp Duty Land Tax (SDLT) charge has applied on the acquisition of such properties since 21 March 2012.

As the dust settles – for the time being – on these new rules, this chapter reflects on the background to their introduction, explains the new rules in overview, and considers the impact they are likely to have, the key points which need to be borne in mind and some of the alternative ways properties can be owned in the UK.

By way of a starting point, it is useful to consider some of the principles which underpin how a foreign individual is charged tax in the UK. It was these that led to the practice of enveloping being developed, and it is these principles that will determine the nature of alternative future structures.


The UK recognises the distinct concepts of domicile and residence in its taxation of individuals. A foreign individual may come to the UK but may not intend to live here permanently. Such an individual is said to be UK resident but non-UK domiciled (non-dom) and will not automatically be subject to UK taxation on their worldwide income and gains.

For Income Tax and CGT purposes a non-dom who is resident in the UK can choose to ‘ring fence’ their foreign income and gains from the UK tax net by electing only to be taxed on the income and gains they remit to the UK.

For Inheritance Tax (IHT) purposes a non-dom will only be subject to IHT on their assets situated in the UK. A non-dom who has been resident in the UK for (broadly) seventeen of the last twenty tax years will be deemed UK domiciled for IHT purposes.

UK property ownership can be structured to keep the non-dom out of the IHT regime on property they own in the UK. This involves the individual using an offshore company to own UK property. The individual then owns the shares in the offshore company or an offshore trust might own the shares, which would not be subject to IHT in the UK.

Until the introduction of ATED neither offshore companies nor offshore trusts would be subject to CGT on the actual disposal of the property, although that is not to say that a UK resident beneficial owner or beneficiary might not be subject to CGT on any gains. However, there was no direct charge and there was a rising tide of political pressure as London property increasingly became a global asset and the demand for property by the international wealthy, whether as a bolt-hole or as an investment, rose. This is now reflected in disproportionately higher property prices than anywhere else in the UK.

London property – a global asset

The central London residential property market is regarded by market commentators as distinct from the wider UK property market. Even within London there are areas which are distinct from the wider London market. These areas are generally confined to two boroughs in West London – the Royal Borough of Kensington and Chelsea and the City of Westminster. This has become known as prime central London. Properties in certain streets in these areas sell for up to £25m, with the most expensive apartment having sold for £13.5m. Prices in these areas have helped lift London to the rank of second most expensive city in the world to buy property[i].

Over the last ten years, London has been a magnet for the international wealthy. It has seen buyers from Russia, the Middle East, Europe (in particular Italy and Greece) and Asia. Property market analysts report that between 65% and 85% of all prime central London properties are purchased by foreign buyers. International demand in this concentrated area is high but supply is low.

The factors affecting the national property market such as employment, inflation and interest rates do not impact on the prime central London market. Property here is regarded as a global asset, subject to global issues and trends. London is seen by international buyers as a safe haven both politically and economically. European buyers want to buy in London to flee the Eurozone crisis. Middle Eastern buyers are escaping the political and economic turmoil following the Arab Spring uprisings. Asian investors may be deterred from buying in their own countries because of high taxes.

London, by contrast, is regarded by many as politically and economically stable, taxes are comparatively low and a relatively weak British Pound means foreign investors can get more for their money. As well as this, London is a culturally rich and diverse place to live, work and learn. It is a draw for international trade, commerce and finance which has always attracted foreign entrepreneurs and employees.

The rationale

Historically the different, and advantageous, position of the non-dom has been tolerated by the UK Government, regardless of the political persuasion of the party in power at the time. Even the introduction of the Remittance Basis Charge (RBC) for non-doms in the Finance Act 2008 did little to detract from the perception that the UK is an attractive place for a non-domiciled individual to live and invest in. The Government noted in a 2011 consultation document that

‘non-domiciled individuals can make a valuable contribution to the UK economy – through the money they spend here, the funds they invest, the skills they bring as employees and the tax they pay.’

The ATED provisions are perhaps consistent with the Government’s overall commitment to welcoming foreign investment in the UK. Relief is available for foreign individuals acquiring property as an investment, but those not eligible for relief make what might be regarded as a fairer contribution to the UK purse. Ironically, for those with more valuable properties the amount of the charge is likely to be considered a relatively modest sum. The charge is likely to be most significant for properties worth around the £2m mark where a valuation either way would mean the difference between paying ATED or not.

The introduction of a ‘mansion tax’ has been a moot point for the UK’s coalition Government, with the Liberal Democrats pushing for the introduction of such a tax in line with their election manifesto to appease their supporters and the pressure from the Labour opposition. Under the Liberal Democrats’ plans a 1% tax would be imposed on all homes worth more than £2m in the UK. The Conservatives are opposed to any such tax. The current ATED charging provisions could be viewed as something of a compromise. Indeed, the application of the ATED rules could easily be extended, now the basic framework has been established.

The ATED rules

The rules are framed by reference to a number of definitions which have to be worked through to assess their application or not. The main ones are as follows:

(a) ATED is charged in relation to a chargeable period which runs for 12 months from 1 April to 31 March (the first of which runs from 1 April 2013 to 31 March 2014).

(b) ATED applies to NNPs which principally means companies but also includes partnerships withcorporatemembers and certain collective investment schemes. NNPs can be UK resident or offshore; NNPs do not include trusts or nominee companies.

(c) An ATED charge arises if on at least one day in the chargeable period a NNP meets the ownership condition in relation to a single dwelling interest with a taxable value exceeding £2m.

(d) A NNP meets the ownership condition if it is beneficially entitled to a single dwelling interest.

(e) A chargeable interest (typically an interest in land in the UK) consisting of a single dwelling is a single dwelling interest.

(f) The taxable value of a single dwelling interest on any day is the market value at the end of the most recent valuation date. The first valuation date is 1 April 2012, then 1 April 2017 and thereafter each 1 April at five year intervals. An acquisition or disposal of land may also trigger a valuation date.

(g) Annual chargeable amounts are set as per the table below by reference to the taxable value of the single-dwelling interest on either the first day of the chargeable period or the first day of the chargeable period on which the chargeable person is within the ATED charge, pro-rated as necessary.

ICLG table2

The ATED charge (but not the valuation bands) will be indexed to the Consumer Price Index (CPI) and increased in April each year based on the CPI of the previous September.

An ATED return for each single dwelling interest needs to be made to HMRC annually with a filing date of 30 April each year and payment of any tax due on or before this date. For the first year of the charge, transitional period provisions applied and for properties owned before 1 April 2013, the first ATED returns were due on 1 October 2013, with payment of the tax due by the end of October 2013. Where a property is acquired after the start of the chargeable period (i.e. after 1 April 2013) an ATED return will generally need to be filed and the tax paid within thirty days of the acquisition (typically the completion date).

The NNP is liable to pay the ATED charge. An issue will be how to fund the ATED payment particularly if the structure does not hold any other assets. Even if there is cash in the structure, payment of the tax could be treated as a taxable remittance of income and gains in certain circumstances. Careful consideration needs to be given to these issues. Interestingly this has not been dealt with on the same basis as the RBC which may indicate a perceived dividing line between the remittance basis of taxation and the taxation of enveloped properties.

There are a number of reliefs available from the ATED charge including a property rental business relief which applies to qualifying rental business (i.e. one which is run on a commercial basis with a view to making a profit). If the property is rented to a non-qualifying individual relief will not apply. A non-qualifying person includes anybody connected with the owner of the property (i.e. persons who control the company or the settlor of a trust which owns shares in the company together with their spouse and relatives and their spouses). Any relief must be claimed in an ATED return. The relief is calculated on the basis of ‘relievable days’ (ie a day when the conditions for relief are met).

CGT on ATED-related gains

From 6 April 2013 CGT will apply to a NNP on the disposal of a chargeable interest in a single dwelling interest valued at more than £2m, and subject to ATED; in such a case, some or all of the gains or losses will be ‘ATED-related’.

The fraction of the gain which is ATED-related will typically be the number of days which were chargeable days for ATED purposes as a fraction of the total period of ownership post 6 April 2013. The balance is non-ATED related and is subject to the normal rules for chargeable gains. Thus, if the company is non-resident it will not be subject to UK taxation on non-ATED related gains. If one of the reliefs available for the ATED charge applies, there will be a reduction in or an absence of ATED-related gains or losses.

The gain or loss will be computed on the basis the NNP had acquired the interest on 5 April 2013 for consideration equal to the market value at that date and any gain taxed at 28%.

Restructuring prior to the introduction of the rules from 1 April 2013 and subsequently

Before the new rules came into force, there were opportunities to unravel existing arrangements (de-envelope) to avoid being chargeable to ATED, and these opportunities continue.

De-enveloping involves liquidating the company which holds the property and transferring it to the individual or to a trust. There was no requirement to submit an ATED return or pay any tax if this was completed before 1 April 2013. This was particularly appealing to those who had run their property structures and, possibly also their wider affairs, so that they had no disclosure obligations to HMRC.

A consequence of de-enveloping is that the individual or the trust is then exposed to IHT on the value of the property. If the property is owned by the individual personally at the time of their death IHT will be charged at 40% over the available nil rate band (currently set at £325,000). If the property is held by an offshore trust it is relevant property for IHT purposes and subject to periodic charges of up to 6% on each ten year anniversary of the trust and exit charges based on a proportion of the last ten yearly charge.

Generally debts are deductible when determining the taxable value of a UK asset for IHT purposes. In the past, it was possible for a non-dom or an offshore trust owning a property in the UK to borrow money offshore and secure this borrowing against the property. Provided the borrowed money was kept offshore it would not be subject to IHT and the debt was allowable to reduce the taxable value of the property for IHT purposes.

The introduction of the General Anti-Abuse Rule (GAAR) meant this type of planning had to be considered carefully. Further, and perhaps more significantly, the changes to the rules concerning the deductibility of certain debt for IHT purposes have directly affected this type of arrangement.

Under the new rules which were announced on 20 March 2013 and took immediate effect, although the debt remains deductible, it is deducted initially against the excluded property. These amended provisions limit the ability to mitigate the IHT liability which arises as a consequence of de-enveloping.

The choice for many individuals and trusts owning high value property can now be stark – pay the ATED charge and suffer CGT on ATED–related gains or de-envelope and suffer IHT.

The choice will depend to a large extent on what the intentions are in the future. Different considerations will apply in each case. For example, if the property is held in an offshore trust set up by a non-dom and the property is subsequently sold, provided the proceeds of sale are held offshore at the time of the next periodic charge there will be no IHT to pay.

The choice may also be informed by the value of the property. If we consider a property held in an offshore trust worth £9m, the IHT periodic charge (assuming the nil rate band remains at its current level of £325,000) would be £520,500 compared to a total ATED charge over a ten year period (assuming the bands remain unchanged) of £350,000. Contrast this with a property which is worth £10.5m, based on the same assumptions as before, the IHT periodic charge would be £610,500 compared to a total ATED charge over the same ten year period of £700,000.

Life assurance is an option for individuals to cover an IHT liability on death. Whether this is a financially viable option will depend on the age and state of health of the life assured. For individuals from the Middle East and Asia who adhere to Shari’a Law, life assurance in its conventional form is forbidden in Islam and is not an option. A market is developing in Shari’a-compliant insurance underwriting but this is in its infancy and does not at this stage offer the same protection against an IHT liability.

The London property market, ATED and the implications for investors

The most immediate effects have been felt at the margins at each of the valuation bands, particularly for properties valued around £2m. For these properties it is important to obtain a professional opinion to support a valuation. HMRC offer a pre-banding checking service for those properties where there is a reasonable belief that the property falls within a 10% variance of the banding threshold. ATED in this context has become a significant issue to consider for prospective purchasers. However, with house prices increasing it is unlikely that those properties with a value just under the £2m threshold now will avoid falling within a chargeable band at the time of the next valuation date.

It is estimated that up to 65% of non-doms purchase property in London to rent out as an alternative to investing their wealth on stock markets, reckoning that these offer a lower return and a higher degree of investment risk. The fact that property investment businesses are relievable from ATED still makes enveloping an attractive form of ownership for foreign property investors.

The current trend in London where space is at a premium is to extend downwards, with basement excavations being common. The purpose of these developments is to maximise space and enhance the features of the property, with excavations typically incorporating home cinemas, gyms and swimming pools. The excavation should not trigger a new valuation date for ATED purposes on the basis there has not been an acquisition of land (rather the land beneath a property is typically already owned by the land owners). However the work is likely to increase the taxable value of a property at the next valuation date which may push the property into a higher chargeable band.

In the past many London townhouses in prime central London were converted into flats or apartments to suit the needs of city dwellers. However, space constraints of flats do not necessarily suit the needs of the international wealthy. Instead they prefer to acquire a number of flats in a building and to knock them into one or restore converted houses back to single dwellings. If two or more adjacent dwellings are knocked into one to create a more substantial ‘single dwelling interest’ a new valuation date will be triggered, and each property will then need to be valued together. As a result an ATED charge could arise or where one, or both of the properties was already within ATED, an increased charge could arise.

A niche area of property work is for leaseholders to join together to acquire the freehold interest in a property. This is known as enfranchisement. The freehold is then owned through a company with each of the leaseholders becoming shareholders. An enveloping company which previously only held the leasehold title now holds two single-dwelling interests in the same dwelling (i.e. the original leasehold title and now a share in the freehold). The separate interests are treated as a single dwelling interest, the taxable value of which is the marriage value of those interests (i.e. the amount a third party would be willing to pay to acquire both interests) which may result in an increased ATED charge.

With competition in London fierce and demand outstripping supply, particularly in prime areas, there is a high demand for new property developments in other parts of London even before they are built. The majority of the apartments at the new Battersea Power Station development have already been purchased by foreign investors even though construction is not scheduled to be completed until 2016. If a buyer contracts to acquire land which includes a building that is yet to be constructed they will be treated as acquiring the dwelling when the contract is substantially performed which could mean either the date of occupation or the date when the majority of the purchase price is paid (i.e. 90% or more) which could mean ATED becomes chargeable even before construction has been finalised.

Prime central London has historically also been home to foreign embassies and other diplomatic offices. The recent exodus of these organisations from their former prime London surroundings to cheaper, more modern and larger premises elsewhere in London has attracted huge competition amongst buyers, with the former Canadian High Commission expected to sell for over £250m. In addition the move by these diplomatic offices to other areas of London will also increase the local economy and property prices in the surrounding area. Indeed interest in the Battersea Power Station development has been fuelled by the fact the US embassy is set to relocate to nearby premises in 2018.

Continued improvements proposed to rail infrastructure are likely to have a positive effect on house prices not just in London but across the country; notably the Crossrail project which will provide a high-frequency suburban commuter service across London from Maidenhead in Berkshire to Shenfield in Essex, and the High Speed 2 (or ‘HS2’ as it has become known) project which, if implemented, will see the creation of a high-speed railway connecting London, the Midlands, Northern England and Scotland. The effect of these projects will be to increase house prices in these areas and push more properties beyond the £2m threshold.

Property ownership structures

What follows is an overview of the tax implications of typical structures for existing foreign property owners who took the decision to wait until the new rules were in force before taking action, for those who were simply not aware of the implications of the rules before they came into force and are only now considering restructuring, and for new buyers of UK property.

1. Corporate ownership (enveloping)

An appropriate place to start is to consider the tax implications of owning or continuing to own a property via an offshore company. Typically the shares in the offshore company could be owned personally or via an offshore trust. This structure is more suitable for individuals who intend to occupy the property, allow connected persons (ie family members) to occupy or rent it out commercially to unconnected persons.


Payable at 15% on the purchase of the property if it is to be occupied by the individual or a connected person (otherwise SDLT payable at 7%).


Payable if occupied by the individual or a connected person.

If the property is rented to unconnected persons the company should qualify for property rental business relief and ATED will not be payable.

CGT on ATED-related gains

The company will be subject to CGT on any ATED-related gain arising on the value of the property since 6 April 2013. This could be avoided if the shareholder of the company were to sell their shares in the company rather than the property. CGT on ATED-related gains will not apply if the company qualifies for relief from ATED.


Non-resident individual shareholders and non-resident trustee shareholders would currently not be subject to CGT on the disposal of the company shares or on the disposal of the property. However, resident shareholders could be subject to CGT on the disposal of the property and the disposal of the shares and any gain in an offshore trust/company structure may be later matched to any distributions made to UK resident beneficiaries.

There is a risk that a non-dom in occupation will be treated as a ‘shadow director’ of the company for Income Tax purposes and become subject to Income Tax on the ‘benefit’ of living in the property. A ‘shadow director’ is a person in accordance with whose instructions the board of the company would be accustomed to act.

A property rental company will be liable for Income Tax on the receipt of rental income and will need to complete a UK tax return disclosing details of the rents received and allowable expenses.


The shares in the offshore company should be excluded property for IHT purposes if the shareholder remains non-UK domiciled and is not deemed domiciled in the UK for IHT purposes.

2. Direct ownership by an offshore trust

The property is held directly by the trustees of an offshore trust set up by the individual or another family member. This structure is typically used when the individual wishes to allow others to occupy the property but does not want them to own the property outright. A trust is less suitable if the property is to be rented out. A trust is not suitable if the individual creating the trust wishes to occupy the property.


Payable at 7% on the purchase of the property.


Not payable (even if corporate trustee appointed).

CGT on ATED-related gains

Not payable.


The non-resident trustees would not be subject to CGT on the sale of the property, although any gain may be matched at some point to any distributions made to or benefits conferred on UK resident beneficiaries.


The property will not be in the individual’s estate for IHT purposes provided the individual is excluded from benefiting under the terms of the trust and does not occupy the property.

The trust will contain relevant property for IHT purposes and the trustees will be subject to charges on the value of the property at ten year anniversaries of the trust and on any distributions from the trust. Any debt obtained offshore and secured on the property will reduce the value of the property for IHT purposes if it has been used to purchase the property under the new restricted debt rules.

3. Personal ownership by an individual (or through a corporate nominee)

The property is held directly by the individual. If the individual is concerned to preserve their confidentiality they could own the property via a nominee company in whose name the property is registered with the Land Registry. Subject to satisfactory management of IHT exposure, personal ownership is appropriate if the individual wishes to occupy the property.


Payable at 7% on the purchase of the property.


Not payable (even if the property is owned by a nominee company on the basis the company has no beneficial interest in the property).

CGT on ATED-related gains

Not payable.


A non-resident individual will not currently be subject to CGT on the sale of the property. Any nominee would be looked through for these purposes.


An individual would be subject to IHT on the value of the property but, depending on the circumstances, this could be mitigated by one or a combination of the following –

(a) life cover written in trust,

(b) making a Will leaving the property (or their UK estate generally) to a surviving spouse or civil partner, or

(c) leveraging against the property but only if the borrowed funds are used to purchase the property.

The purchaser may wish to borrow from their own offshore trust or company to purchase the property. This would be an allowable deduction against the property for IHT purposes provided the funds are used to purchase or maintain or enhance the property. However, borrowing from oneself could be caught by the GAAR.

4. Summary

ICLG table

1 Assuming no relief available

2 Assuming non-UK resident for income tax and CGT purposes

3 Unless let to unconnected third party in which case 7% payable

4 Gains may be stockpiled and beneficiaries liable to CGT on distribution

ATED – a tax worth paying?

The ATED charge and the other tax implications of property ownership should not be considered in isolation to the non-tax issues which are also relevant to foreign buyers and existing property owners, many of which can often override the tax consequences of a particular arrangement.

With property prices increasing at the rate of 8.7% in London generally over the last year to August 2013, many foreign buyers of UK property see ATED as a tax worth paying to benefit from the increase in value year on year, in contrast to yields from equities. For example, on the basis of this statistic a property worth £3m in 2013 could increase in value by £230,000 in 2014 taking into account the ATED charge. CGT will also be payable on any ATED-related gain arising on the sale of the property since 6 April 2013 at 28% but even factoring this in, a net gain would prevail.

There is also a cultural reluctance by some foreign nationals, particularly from civil law jurisdictions, to want to give their property away on trust. Personal ownership would mean the property owner’s identity would be disclosed. If the individual is concerned to preserve their confidentiality they could own the property via a nominee company in whose name the property is registered with the Land Registry but the beneficial interest would be held personally.

Many foreign and UK investors regard the UK as emerging from recession with the stability of the economy and the growth in consumer confidence as very attractive, particularly when contrasted with the economic and political uncertainty abroad. They see London prices as representing good value having regard to apparent weakness of the British Pound against other major currencies. In comparative terms, for the wealthy the ATED charge is a relatively modest sum to pay in order to achieve the advantages they seek. Indeed, taxpayers who own properties in other jurisdictions may be used to paying such charges.


The deadline for submission of the first ATED returns was 1 October 2013 and the tax due needed to be paid by the end of October during the first year of implementation. Although official figures have yet to be published it is understood that the ATED charge for this first year has generated higher revenues than the Government had anticipated.

ATED was introduced in an attempt to dissuade foreign investors from owning properties in enveloped structures. As we have highlighted, many existing foreign investors are unlikely to be put off from doing so, particularly in light of the IHT implications of owning a property outside a company, and perhaps most significantly having regard to the number of non-tax reasons for wanting to envelope their UK property ownership. Indeed many foreign property owners and buyers will view it as a necessary premium to pay in order to do so. The fact more revenues have been generated might indicate that fewer people have been put off from owning a property in a company envelope than the Government had intended. However the ATED charge is but one of three measures, and the combined effect of all three, particularly the 15% SDLT rate on new purchases, could deter many foreign buyers from owning in the future in enveloped structures.

With the average property prices in prime central London over six times higher than the national average, and with demand from foreign buyers predicted to push prices up even higher, it is perhaps unsurprising that the Government is thought to be looking at imposing more wide ranging measures targeting foreign buyers in an attempt to deflate what commentators perceive as a property bubble in prime central London areas even before the true impact of the ATED provisions is known.

The focused nature of the Government’s proposals in relation to foreign buyers is consistent with the Government’s stance against the introduction of a wider ranging mansion tax particularly given that UK property owners are said to already pay twice as much as the international average in property taxes . The intriguing prospect is how any further measures targeting foreign property owners might be imposed in light of the Government’s commitment to foreign investment.

25 Feb 2014

Matthew Braithwaite

Helen Ratcliffe