Flat Mangement Company - Freehold value?

Flat Management Company 1st Accounts

Didn't find your answer?

Hi all, grateful for some help as I'm relatively new to this. Please bear with me as I know it's a long question!

I'm a director of a newly incorporated flat management company that was set up to own the freehold title of a building split into 4 leasehold flats. Each leaseholder (including me) is a Member and Director of the company.  All of the 4 leaseholds were sold within a year of each other and all have 999yr lease terms and "peppercorn on demand" ground rent. The company's sole purpose is to own the freehold and buy buildings insurance and other services as requried for the upkeep of common areas.

Now, I understand there's a big argument that has not been properly resolved by the accounting profession about how to account for service charges and if such companies can be treated as dormant for accounting purposes. That aside, I've decided to put all the service charges through the company accounts and file as an active company (filing as micro-entity?).  Since there is no ground rent to collect (and no profit) I belive that therefore the company accounts and service charge accounts are effectively the same so I won't have to produce 2 sets of accounts?

There is no ringfenced bank account. In practice I pay for everything up front myself (as agreed between us first) and then ask for money back at the end of the year. Therefore there is never any surplus money. The aim here is to keep things as simple and easy as possible.

1. The transfer of the freehold to a flat mangement company was a condition of sale for the leaseholds (to be transferred after the last flat had sold). However as leaseholders we only paid the seller his legal costs of the transfer of the freehold totalling £1600.00.  Now since the freehold doens't attract any ground rent, and the leases are all 999ys, and there's vertually no development oppertunity (non of the neighbours have extensions as it's a conservation area) am I right in saying that the intrinsic value of the Freehold is zero - and I can but zero on the balance sheet?  Any reason this is not advisable?

2. An alternative approach is that I can capitalise the legal costs into the value of the asset and enter £1600 and then I would have to put 4x£400 director's loans into the liabilities side to balance.  Which of these is the best approach?  Also if I do the latter would I have to depreciate the $1600 every year?

Many thanks. Hope the above makes sense. I know some will say "pay for an accountant to do it" but there are literally only 2 outgoing transactions this year (insurance and £13 filing fee) and 4 incoming (4 x SC fees). I got a quote for £600 which seems crazy given that this should be a 5 min exercise.

 

Replies (12)

Please login or register to join the discussion.

Flag of the Soviet Union
By thevaliant
21st Sep 2018 15:25

When I did it, and I agree with you about running the accounts and service charge through the company, but that's a whole different debate, the freehold cost £41 (£1 + £40 stamp duty). I capitalised it. CR Bank and DR Freehold.

In your case, the freehold is £1,600 but you are right it is near worthless. I assume it was funded by you all putting £400 in. I suppose it depends whether you expect to see this back or not.

Either, DR Freehold LAND £1,600;
CR Directors loan accounts £1,600

Or, possibly, CR Some sort of sundry income £1,600 and don't worry about it.

Haven't thought of the tax implications of crediting the £1,600 to I&E. I'm sure someone will suggest its taxable income, but I don't think it is.

Oh, and the freehold WON'T be depreciated. It's LAND. It doesn't depreciate.

Thanks (1)
Replying to thevaliant:
avatar
By deFoix
21st Sep 2018 16:42

Thanks for that. Yes I'm thinking going with the first option because it's simpler. I don't think any of us is expecting the money back. However if/when one of us sells the leasehold they could in theory demand the loan is repaid I guess.

Yes if I say its all land value then that solves that problem!

Any issue with micro-entity filing? I'm using Wave online app to do the book keeping. Seems to be ok.

Thanks (0)
avatar
By Matrix
21st Sep 2018 16:54

In the flat accounts I prepare the other side of entry for the freehold is included in the bottom half of the balance sheet under Members in Freehold property.

Thanks (1)
Replying to Matrix:
avatar
By deFoix
21st Sep 2018 17:29

Does this mean that it's recorded as a liability (equivalent to a Director's loan)? Thanks.

Thanks (0)
Replying to deFoix:
avatar
By Matrix
21st Sep 2018 17:37

No it is not a liability, it is in the bottom half of the balance sheet - as shareholders equity would be the best explanation.

Thanks (2)
Replying to Matrix:
avatar
By deFoix
21st Sep 2018 17:55

Ah ok thanks. Would that still be valid for a company limited by guarantee?

Thanks (0)
Replying to deFoix:
Flag of the Soviet Union
By thevaliant
22nd Sep 2018 00:42

Yes, I would agree with Matrix. It's members reserves. They're not going to get it back, but likewise it is worth something to the members.

The posts over on LLzone Forum also tell me why it IS worth something. Preventing anyone else getting that land is crucial.

Thanks (1)
Red Leader
By Red Leader
21st Sep 2018 17:48

If it's a 5 mins job, how long have you spent on it so far?

Thanks (0)
Replying to Red Leader:
avatar
By deFoix
21st Sep 2018 17:59

5m for a pro ;-)

The other problem I have is that I would really struggle to convince the other Leaseholders/Members/Directors to cough up another £150 quid each.

I'm convinced I can do this myself and get it right with a touch of help from you guys!

Thanks (0)
Replying to deFoix:
avatar
By Jo Nokes
22nd Sep 2018 20:56

I would just add that you might consider collecting more than what is required for current costs, to build up a reserve for major redecorations etc. It's a good point when an owner wishes to sell

Thanks (0)
Replying to Jo Nokes:
avatar
By deFoix
23rd Sep 2018 23:51

Hi Jo,

Yes I agree that would be the best thing to do. Unfortunately our leases do not allow for any sinking or reserve fund to be levied as it's not explicitly mentioned. Only insurance and other reasonable services. Although I'll ask the other leaseholders and if the other's agree to it then I suppose it doesn't really matter.

Thanks (0)
avatar
By deFoix
24th Sep 2018 00:06

Interesting, I downloaded a bunch of company accounts from Companies House and searched for the text strings "* Flat Management" and "* Road Limited" etc. to call up some relevant results. About half of them were filing dormant accounts. The rest either had zero balance sheets or did as advised above. I'll be filing £1600 fixed assets (investment property) and a corresponding Members Reserve.

Thanks!

Thanks (0)