Set up Management company to manage own properties

I would think this is fine

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Hi All

I have been approached by a new client and the scenario is as follows - Client owns 20 properties (10 by self) (10 owned 50/50).

To counteract some of the issues with the mortgage interest restriction, the client wants to set up a management company (as he does manage all of the properties) and charge 10% rental fees to each of the properties each month.

i.e. £100 from property 1, property 2 etc.

The net effect being reduce the profits chargeable at higher rate tax on the personal tax return and that element being charged at the lower rate of 19% corporation tax. Those profits will then be retained within the company for draw down later down the line and any distribution of those profits taxed at a later date.

The client has devised this plan and come to us with it so i want to see if there are any glaring issues in this or if HMRC would challenge it? The amount seems reasonable.

Many thanks

Replies (8)

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By Accountant A
07th Mar 2019 14:11

PALacc wrote:

The client has devised this plan and come to us with it so i want to see if there are any glaring issues in this or if HMRC would challenge it?

Not exactly rocket science, is it? Or am I missing something really obvious? Wouldn't have thought there was a problem as long as the transactions are at arm's length. I'd be putting in place a written agreement so that it's clear what the charges cover.

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By Duggimon
07th Mar 2019 14:19

10% of rent is about market rate isn't it? So long as you stick to that and get the paperwork right so it's not a flimsy sham you should be fine.

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By SpaceDuck
07th Mar 2019 15:57

Out of interest could this also work if the client already has an actual management company in place but wanted to charge an additional management fee for managing the properties.

In this situation I guess this would relate to arranging insurances, sorting out service charge payments etc. My initial thought is HMRC would see this as taking the mick.

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Replying to SpaceDuck:
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By Accountant A
07th Mar 2019 17:54

SpaceDuck wrote:

Out of interest could this also work if the client already has an actual management company in place but wanted to charge an additional management fee for managing the properties.

In this situation I guess this would relate to arranging insurances, sorting out service charge payments etc. My initial thought is HMRC would see this as taking the mick.

If someone else is being paid to manage the properties, the arm's length value of other "services" is going to be pretty modest, presumably. Either it's a market rate for the service or it's making an excessive tax relief claim.

It would make sense for the client to research local agent's Ts & Cs to use as a benchmark. If you stick to that ballpark, I doubt HMRC would pick a fight about it.

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By PALacc
07th Mar 2019 16:09

On further thing - the tenants rents would not be required to be paid into the management company bank account would they?

the management company can simply invoice the owner each month for the 10% management fee?

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By SpaceDuck
07th Mar 2019 17:21

Shouldn't you have a client account to hold the rental income?

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By ireallyshouldknowthisbut
07th Mar 2019 17:37

So long as you do it properly and its in line with market rates, no problem. Indeed the rate might be higher than 10% in some areas.

I would be a little suspect however if it was "as we are now" with a director's loan balance for the notional 'commision' once a month and zero costs booked through. I would expect to see all the running costs etc booked through, and the repairs etc etc etc, even if you leave the rents running direct, so as to demonstrate what the agent company is actually doing. I would also ensure all contracts etc reference the agency name, and client name etc.

To make is bullet proof you really need a proper client account, book the rents through as a normal agency would, plus of course taking on some other managements would be a boon. It depends how risk adverse your client is vs how much hassle they want.

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By marshmallow
21st Nov 2020 21:43

Thank you for your thoughts. I'm interested in that. In fact, I think this is a great idea for those who own real estate in different countries. And I hope that soon I will be one of them. Well, I have extra money to invest in the business. Thus I found property for sale in Sofia from suprimmo.net. Because I think Bulgaria is a good country to invest in real estate because of small taxes. And I found very good deals at attractive prices. But I will consult with a real estate agent to make the right decision. In any case, I want to know your opinion on this.

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