Rental business through company without owning the property?

Rental business through company without owning...

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A new client company (four shareholders but soon to reduce to two shareholders) rents out a residential property that is owned by two of the individuals. The mortgage is in the name of the two individuals and there was a Tenancy in Common agreement that the solicitor has said can be torn up if any party doesn't want it to continue.

So the company is effectively a property management company, receiving the rent, paying a non market rent to the owner (equivalent to the mortgage interest) and accumulating the income from the property rentals.

Questions:

  1. Is it alright to do this? I can't think why not, as the company is basically no different from a rental agent that finds a tenant and deals with expenses etc. The difference being that instead of charging 15% commission, it is charging on a different basis. 
  2. If so, is it alright not to charge the company market rent?
  3. Would a property management agreement, similar to that used by rental agencies, be sufficient to document the arrangement?

Thanks a good weekend.

Replies (5)

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By King_Maker
22nd May 2015 19:26

So, is it a property management company or a property investment company?

What does the Declaration of Trust actually say on the matter? Its unilateral "destruction" is unlikely to be permitted.

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Replying to Matrix:
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By newmoon
28th May 2015 17:00

It isn't clear.

King_Maker wrote:

So, is it a property management company or a property investment company?

What does the Declaration of Trust actually say on the matter? Its unilateral "destruction" is unlikely to be permitted.

At the moment the company is a property management company as it doesn't actually own any properties.

However the management cost are equivalent to the rent less expenses, so the property owners do not make any rental profits.

 

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By King_Maker
28th May 2015 17:36

It is very unlikely that HMRC will permit a management fee greater than ~ 15% - unless it can be demonstrated that independent agents in the area do charge more for the same services.

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By newmoon
28th May 2015 20:57

Thanks

Thank you and I would agree, it just isn't commercial.

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By Stuart.thomson
29th May 2015 05:47

Even if HMRC accept some commercial argument for the arrangements, the two remaining shareholders who I suspect are the property owners (yes?) are going to be caught as connected parties and rental income will be deemed at market value which has helpfully been set by the company with a third party.

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