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PROPERTY MANAGEMENT COMPANY

Husband and wife own four investment properties(90% wife: 10% husband). Both are 40% taxpayers. They do not wish to transfer the properties into a limited company due to CGT on transfers.  Instead, they wish to form a company which will pay a much reduced rental to husband and wife. The gross rents will be collected by the company for it's management.Therefore, the rental profits will be mostly taxed at 19% corporation tax rate, instead of the present 40% that the individuals are paying. This seems to good to be true.  I am sure that HMRC will see this as some form of 'goodwill transfer' to the company and they may well question the relatively high 'management' charges.  Any comments?

 

 

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09th Nov 2017 18:31

Quote:

  Any comments?

(1) Don't post anonymously

(2) Appoint an accountant

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to Accountant A
09th Nov 2017 19:38

Thank you. Accountant A. Sorry that I posted anonymously . I have referred the client to specialist tax experts since the situation seems straight forward but highly unusual. The reason for my posting is to gather whether other fellow accountants have come across something similar.

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09th Nov 2017 21:23

Quote:

Thank you. Accountant A. Sorry that I posted anonymously . I have referred the client to specialist tax experts since the situation seems straight forward but highly unusual. The reason for my posting is to gather whether other fellow accountants have come across something similar.

What you describe is some kind of scam using non-commercial transactions between connected parties so no, it won't 'work'. They can have their own property management company which can charge a commercial rate for whatever services the company provides. Whether any tax saving then justifies the costs is the key question.

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By Ruddles
09th Nov 2017 21:42

Who told you/your clients that this would work?

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to Ruddles
10th Nov 2017 00:32

My initial reaction was that HMRC would question the very low rents the husband/wife would receive from the company. This is after many years of receiving high rents from the same properties.Also the company would be earning property management income of well over 50 per cent of gross rents: i.e industry norm is 8 to 12 per cent.
Everything appeals normal but the non-commercial transactions will certainly be scrutinised.

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By Ruddles
10th Nov 2017 08:15

Everything appeals (sic) normal? No, it doesn't!

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to Ruddles
10th Nov 2017 08:53

Typing error! I meant ‘everything appears legal’. Because of this there is a possibility that fellow accountants may have seen this.

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10th Nov 2017 10:27

It's not legal. Well, it's not legal if they go ahead and file the tax returns on the basis that they are anticipating.

Fellow accountants will indeed have had similar suggestions from clients and have explained to them, gently, that made up constructs like this are flimsy and don't work because they have been legislated against long before they thought of them.

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