Share this content
26

Do I need to file ground rent/income as tax return

Tax Return on ground rent income for RPM

Didn't find your answer?

I recently purchased a flat in a building under leasehold that consists of only 3 apartments in total. The seller is willing to sell the freehold of the entire building under the structure of Resident Property Management limited company (by shares). I agree to the sale and become the sole director of the limited company which has the overall freehold of the property.

I am allowed to collect £200 ground rent from each leaseholder and I also intend to share the service charge (building insurance) among us three. I will not make any profit of the service charge and thus the ground rent will be my only income. My question is do I need to file any tax return on behalf of the company/for myself for the ground rent that I gain in this case?

Please kindly suggest if there is a simpler way to deal with this situation as it is quite pointless to hire an accountant to do the paperwork just for that little ground rent income. Alternatively, can the tax returned be filed by myself without hiring an external accountant?

Replies (26)

Please login or register to join the discussion.

avatar
By SXGuy
10th Jul 2020 16:28

I'm sure it's pointless hiring an accountant for that little income.

I mean, it's not like your confused over whether the income is your personally or the Ltd companies.

Its not like its hard to file ixrbl compliant company accounts to hmrc and accounts to companies House.

And I guess you understand the differences between corporation tax on profits no matter how small, as well as potentional income tax issues depending on how you draw the profits for yourself, as well as declaring those drawings to hmrc.

You probably don't need an accountant to advise you of the best method of extraction either.

Those are all sarcastic comments BTW, just to prove a point, that an accountant doesnt just "file a tax return for such little income"

Thanks (4)
avatar
By Anonymous.
10th Jul 2020 16:29

What was happening prior to your purchase? You presumably have seen teh accounts for prior years.

Yes, you can certainly do any tax return yourself, by the way.

Thanks (1)
avatar
By lesley.barnes
10th Jul 2020 16:41

Your mistake was not speaking to an accountant before you purchased the freehold. Yes you can file your own abbreviated accounts at Companies House, Corporation Tax return and accounts with HMRC. You might need to file a personal tax return as well depending on your circumstances and how you extract any profits that might be left in the company. Don't forget to file the confirmation statement as well.

Thanks (1)
RLI
By lionofludesch
10th Jul 2020 16:49

Forgive me if I've misunderstood but I infer that you will buy nothing.

A property management company will buy it.

You say you will be sole director - who will be the shareholders ? The shareholders own the company, not the director.

The tenants will have rights under the Landlord and Tenant Act as well as the company's obligations under the Companies Acts.

Take proper advice urgently.

Thanks (1)
Replying to lionofludesch:
avatar
By Anonymous.
10th Jul 2020 17:02

lionofludesch wrote:

Forgive me if I've misunderstood but I infer that you will buy nothing.

A property management company will buy it.

You say you will be sole director - who will be the shareholders ? The shareholders own the company, not the director.

The tenants will have rights under the Landlord and Tenant Act as well as the company's obligations under the Companies Acts.

Take proper advice urgently.

I've possibly misunderstood. I was thinking that the company already held the freehold (as, I believe, is the usual case in leasehold residential arrangements).

Having re-read the question, not sure that would make sense!

Thanks (2)
Replying to Anonymous.:
RLI
By lionofludesch
10th Jul 2020 17:02

Anonymous. wrote:

I've possibly misunderstood.

Given the garbled nature of the OP, perfectly understandable.

It could be me who has it wrong. Who knows ?

Thanks (1)
avatar
By Truthsayer
10th Jul 2020 16:57

Ikakachun, you have no idea what you are talking about, and therefore the answer to your last question is NO!! Get an accountant.

Thanks (1)
avatar
By Paul Crowley
10th Jul 2020 17:22

If you know all the company house rules and Corp Tax rules then go ahead.
Not difficult to find out provided that you check your sources.
But blame yourself if you misunderstand the rules. And definitely do not try to claim that it is a dormant company.
Make sure you know how to deal with requests to extend leases.That is the one that is critical
How do you intend to deal with solicitors enquiries when someone wants to sell his flat?

Thanks (2)
avatar
By Tax Dragon
11th Jul 2020 09:18

How much are you paying for this? Do you think you will get your money back? How, when?

Thanks (1)
avatar
By lkakachun
11th Jul 2020 12:05

Hi all,

Thank you for all your inputs. I am not trying to downgrade Accountants' effort and work, it is more about to understand how much work I have to put in to manage this limited company.

Although I have agreed to the sales, I haven't signed the final contract yet which means I can still pull out if I don't feel confortable with the sale.

A little bit more background:
The seller will sell the freehold of the entire property as a Resident Property Management limited company at the price of £20,000. Looking at Company house history, the company has been filing account for Dormant Company since the set up of the company. But recently, it changed to file Micro company account, I am not sure why this was done.
As the freeholder, I do not intend to make any profit just manage the property as one of the 3 flats is the one I will be living in. I am planning to keep the profits made on grount rent income.

Thanks (0)
Replying to lkakachun:
avatar
By SXGuy
11th Jul 2020 12:18

There is a reason for the past dormant accounts. And probably a reason for changing to micro entity accounts now.

That's a big hint for you to research why this is the case.

Thanks (1)
Replying to lkakachun:
RLI
By lionofludesch
11th Jul 2020 13:26

The usual arrangement in RP companies is for each leaseholder to own one share.

It's not mandatory but take advice.

Thanks (1)
Replying to lionofludesch:
avatar
By lkakachun
11th Jul 2020 15:02

I reckon the other two flat leaseholders are not interested in the freehold purchases, that s why remaining leaseholder (the current seller) gets them all (all shares)

Thanks (1)
Replying to lkakachun:
RLI
By lionofludesch
11th Jul 2020 15:09

lkakachun wrote:

I reckon the other two flat leaseholders are not interested in the freehold purchases, that s why remaining leaseholder (the current seller) gets them all (all shares)

So you don't live there. You're just buying this as an investment.

I still think you should take advice. Especially about the company's Landlord and Tenant Act obligations. Up to you, obviously.

Thanks (1)
Replying to lkakachun:
avatar
By Anonymous.
11th Jul 2020 15:01

lkakachun wrote:

The seller will sell the freehold of the entire property as a Resident Property Management limited company at the price of £20,000.
As the freeholder, I do not intend to make any profit just manage the property as one of the 3 flats is the one I will be living in. I am planning to keep the profits made on grount rent income.

So you are buying a company which owns the freehold for £20,000. The company (not you) has the right to £200 (pa?) ground rent per flat - so £400 or £600 if you also have to pay. Is there any escalation of ground rents included in the lease? eg RPI indexation? £600 less corporation tax would leave the company with £486 which (assuming it is permitted) could be paid to you as a dividend giving you a return of 2.4% pa.

I can't reconcile the statements "I do not intend to make any profit " and "I am planning to keep the profits made on grount rent income".

What is your motivation to do this? Did you initiate or was it offered to you?

Thanks (1)
Replying to Anonymous.:
avatar
By lkakachun
11th Jul 2020 15:29

The whole reason for me to purchase the freehold is to have more control on the flat (better flexibility when I do potential loft conversion and also no ridiculous services charge). The ground rent part just comes as a bonus.

The seller just says the limited company owns the freehold and I can charge other two leaseholder ground rent and service charge. Sadly there is not much more information I can obtain. The seller sells the flat under leasehold originally, but with a note saying it is possible to purchase the freehold as well. That is why I am here to gather ideas to see if there is a pitfall or potential responsiblity when I get this freehold company.

Thanks (0)
Replying to lkakachun:
avatar
By Anonymous.
11th Jul 2020 15:38

lkakachun wrote:

>The seller just says the limited company owns the freehold and I can charge other two leaseholder ground rent and service charge. Sadly there is not much more information I can obtain.

Personally, I wouldn't spend £20,000 unless I had much more detailed information.

Thanks (1)
Replying to lkakachun:
RLI
By lionofludesch
11th Jul 2020 15:49

lkakachun wrote:

The whole reason for me to purchase the freehold is to have more control on the flat (better flexibility when I do potential loft conversion and also no ridiculous services charge). The ground rent part just comes as a bonus.

The seller just says the limited company owns the freehold and I can charge other two leaseholder ground rent and service charge. Sadly there is not much more information I can obtain. The seller sells the flat under leasehold originally, but with a note saying it is possible to purchase the freehold as well. That is why I am here to gather ideas to see if there is a pitfall or potential responsiblity when I get this freehold company.

So we're dragging it out of you bit by bit.

You now seem to be buying a lease hold flat off the current owner and he's offering you the freehold as well. You seem to imply that you won't have any of these tiresome service costs - maybe because you'll be billing them out to the other tenants ? It's not clear ....

Why don't you just tell us your tale so that we have some proper facts to work on ?

If you aren't completely open, you won't be able to rely on any comments we make.

Thanks (1)
By Tim Vane
11th Jul 2020 13:27

Offer to buy the freehold for £10k instead of £20k. If the seller agrees, walk away.

Thanks (1)
Replying to Tim Vane:
avatar
By lkakachun
11th Jul 2020 15:03

Would you mind telling me a bit more?

Thanks (0)
avatar
By Paul Crowley
11th Jul 2020 16:38

What do you intend to do on sale? ( When you move out of flat )
What will be the cost of your flat?
How do you intend to sell the shares in the investment company?
Willl you extend your lease for free?

Thanks (1)
Replying to Paul Crowley:
avatar
By lkakachun
12th Jul 2020 11:06

1. I will aim to sell the leasehold of the house and also sell the RPM limited company together. As I will not want to have more tie with this RPM limited company if I do not live in it. But I have no idea what to do if the future potential buyer is not interested in the freehold purchase.
2. My cost of the house is under £500,000. But I will have the leasehold of the flat under my name, not the RPM owns the flat, so no ATED tax if that is your question?
3. Once I have done my loft conversion, I will try to sell the shares to other two leaseholders with a reasonable price. Of course, that also depends on if they want to buy it.
4. If the other leaseholders buys the share of the company, and we all become share of freehold. Then we can extend anyone’s lease for free. But if I still have the sole ownership of the freehold, then I will charge a reasonable premium on that.

Thanks (0)
Replying to lkakachun:
avatar
By Tax Dragon
13th Jul 2020 18:26

lkakachun wrote:

If the other leaseholders buys the share of the company, and we all become share of freehold. Then we can extend anyone’s lease for free. But if I still have the sole ownership of the freehold, then I will charge a reasonable premium on that.

IF the company BENEFICIALLY owns the freehold then asset stripping the company in the way you think gives both it and you tax issues. But before you get to the tax, you have to deal with the legals. So I agree Lesley's comment below. Get your solicitor involved before you end up £20k or more out of pocket for no reason. (Hence also my previous comment and Tim's "offer £10k" advice.)

Once the legals are sorted, you can think about the tax. In that regard too, I would recommend taking advice. This really isn't about preparing accounts for £600 of income.

Thanks (0)
avatar
By lkakachun
12th Jul 2020 10:49

Hi all again,

I am more than happy to give you as much information as you need. So please feel free to leave comment and I will try my best to answer.

Indeed, I am buying a lease hold flat off the current owner and the seller is offering me the freehold as well. From what I understand, having freehold is always better as one will have more control on the building, thus I requested to purchase the freehold as well.

As I am dealing with a state agent, I cannot get in touch with the seller directly, the information I am given is relatively limited. From what I understand, the housing agent said the freeholder will only need to cover the building insurance and all other repair maintenance will be shared by all 3 flats (which includes myself). And on top, freeholder can collect £200 pounds ground rent from each flat. I asked the agent, if the seller can transfer the freehold right to me directly under my name, instead of me buying the company. The agent told me that the freehold right has to be sold as a limited company structure and it is hard to transfer the freehold under a person’ s name. (The agent may not know much and he just wants to secure the deal)

In order not to give myself into trouble, I did all research I can, from land registry and company house. And here is the timeline: There are 3 flats namely Flat A,B,C, Flat C is the one I intended to buy.

04/ 2014: Flat A was sold under a lease of 125 years
08/ 2014: Flat C was sold under a lease of 125 years (Owned by Mr & Mrs seller)
01/2015: Flat B was sold under a lease of 125 years

08/2016: The Resident Property Management company (RPM)was set up. Mr & Mrs Seller are the directors of the company and each own 3 shares.
12/2016: The RPM bought the entire freehold for £17,500, shown on Land Registry.
05/2018: File Dormant Company Account
06/2019: File Dormant Company Account
05/2020: File Micro company Account

Thank you in advance for your replies.

Thanks (0)
avatar
By lesley.barnes
12th Jul 2020 11:40

Should you not be speaking to your solicitor who is dealing with the purchase of the flat about the implications of the freehold, if the estate agent is being vague. They will be able to request all the documentation from the sellers solicitors and explain any pitfalls of this purchase to you. They will also be able to advise whether there is anything preventing you from doing a loft convertion which seems to be the reason for you purchasing the freehold because you then want to try to sell the freehold to the other flat owners if possible. The freehold belongs to a company not you personally, you also say that the company has to cover the insurance which you are hoping to claim from the three flats. What happens if the other flat holders don't want to pay the insurance or for repairs? I think you issues at the moment are legal than accounting.

Thanks (0)
Share this content

Related posts