Post-enfranchisement, is ground rent still payable?

[Midnight Cowboy]

Hi everybody, I just have a quick question.

I own a flat in a block of 8, and 4 of us have just successfully bought the freehold. The task has fallen to me to prepare the first year's budget and give everybody an invoice for the year's charges. Am I right in thinking that the 4 leaseholders will be charged ground rent as before, but the 4 freeholders won't have to be charged ground rent any more?

Thanks!

[Paragon]

You would only be paying yourself - so, I don't see a reason for collecting it.

[Midnight Cowboy]

Thanks Paragon, that's what I thought. In fact, not only would we be paying ourselves, it would be profit in the company which we'd be taxed on if we withdrew it!

[P.Pilcher]

The four of you who have made a substantial investment out of your own pockets should not be paying rent and you, as directors of the company, may decide to reward yourselves further by charging yourselves less in service charges than you charge the remaining lessees. This should probably be done by paying yourselves a dividend, not indicating in the accounts that you are required to make available to lessees that you have done this! Of coyrse the rent that you receive from these lessees also goes in your collective pockets (after allowing for tax of course!)

P.P.

[jeffrey]

Posts #2 and 4 are wrong! This is why:
1. Lessees still have to pay, at present. If one is to sell or remortgage, a g/r receipt will be essential.
2. Co. is going to be taxed on ground rent income, anyway, even if it stops collecting.
3. Solution: Deeds of Variation (to delete rent covenant, if that's all that needs altering and existing leases are otherwise OK) OR Deeds of Surrender and Regrant (esp. if lease terms need extending).

[Paragon]

Sounds very complicated Jeffrey and very expensive, and a good source of income for someone.

Receipts are no problem. They can be created at any time and signed by the leaseholder and the freeholder (who just happen to be the same person) if someone really wants to see that £400 has been paid over 20 years.

In my case, my flats have the same ground rent =£20/year. I am the leaseholder of the flats and the freeholder of the building. If I were to bother collecting the g/r - I would have to put it on the tax returns as income, and at the same time, deduct it as a taxable expense = the effect being neutral liability.

Since we can't even find £billions that have gone missing - I don't think anyone is going to be too concerned about £400 over 20 years, especially since the differential is zero.

[jeffrey]

Why are ground rent receipts vital? Read s.45(2) of Law of Property Act 1925.
AND the rental income is taxable, whether collected or not, so never try to be 'clever' with HMRC- they have no sense of humour, you know.

[Paragon]

Why would income be taxable if never received? If it is due and not paid - it actually could be considered as a bad debt deduction in some cases.

E.G. If depositers don't receive interest on their Icelandic deposits - would they still have to pay taxes on the phantom income?

[jeffrey]

Why would income be taxable if never received? If it is due and not paid - it actually could be considered as a bad debt deduction in some cases.

E.G. If depositers don't receive interest on their Icelandic deposits - would they still have to pay taxes on the phantom income?

Icelandic Banks are a rubbish example, as UK income tax on interest is deducted at source.
Income Tax is not merely a tax on received £££. It's the legal entitlement to receive £££ that triggers tax liability.

[Midnight Cowboy]

Thanks for all your answers. Because I wanted to be absolutely certain, I decided to go back to my solicitor, and pay to get the right answer! And the answer was that the new freeholders still have to pay ground rent as it stated in their leases; but obviously this is daft as the money goes into the freeholding company's account where, if it gets distributed back to the company's shareholders as part of a dividend, tax would be deducted.

The solution is to change the leases of the new freeholders. Obviously there won't be any argument, so the cheapest way is to add a Deed of Variation to each lease changing the ground rent to a peppercorn rent (ie. zero).

So there you go!

[jeffrey]

Good! Your solicitor agrees with my post #5.

Jeffrey 1
Paragon 0
(after extra time)

[Paragon]

Many thanks for your replies. Very interesting. Different responses depending on whether you are a lawyer or an accountant. I checked with an accountant, not mine as yet, who stated that maybe technically it should be, but that in practice it is ignored based on the premise that you can not make a profit from yourself and that the net result to the tax man is zero and, therefore, he has no interest in the matter.

However, I will accept the score of 1 - 0 - but being played under protest.