Ground rent - is it profit?

[Pearls]

Hi,
It's six months since ten of us (flat leaseholders) collectively bought our freehold. We have just collected the ground rent for this year and paid it into our company bank account.
Since seven of the leaseholders did not join in with us on the freehold purchase, some of us will make a tiny "profit" from their ground rent (depending on shareholding) when we redistribute the funds.

Please could you let us know whether we are still okay submitting a "nil" set of accounts for our limited company and whether the ground rent refunds are officially "dividends" on our shareholdings and therefore of interest to the tax man.

We are paying a management agent to do the building maintenance, which is charged separately out of maintenance fees collected directly by the agent.

The ground rents are the only funds which pass through our freehold company.

Many thanks
Pearls

ps The building management is going well and the building is looking smart and tidy.

[Tipper]

Surely the management agent is being paid by the 'company' and also collecting money on the 'company's' behalf. Therefore there is more turnover than you think.

But why are you paying dividends? Don't you use the money to pay for maintenance and repairs or insurance or similar?

Isn't the 'company' non-profit making so why tax?

[sgclacy]

The ground rent income is taxable in the hands of the company. You can declare a dividend out of these post tax profits but you will need to issue a voucher stating the amount of dividend and the tax credit , so that memebers can put it on their tax return.

[Gordon999]

Pearls,

You should put up your question in the "tax section" for the accountants to advise. I presume that after paying the annual company fees , there may not be much profit to record in your accounts and there may be company tax at 21%.

Check on the Companies House site as to when your company accounts are due .

[Gordon999]

Surely the management agent is being paid by the 'company' and also collecting money on the 'company's' behalf. Therefore there is more turnover than you think.

But why are you paying dividends? Don't you use the money to pay for maintenance and repairs or insurance or similar?

Isn't the 'company' non-profit making so why tax?

The freehold company has 10 shareholders and receives ground rent income from the other 7 non-participants. this income belongs to the company and surplus after deduction of running expenses is liable to tax

The service charge account has 17 members and is non- profit making.

[thevaliant]

Agree with Gordon. Do distinguish between:

A) The service charge account for the 17 member. I understand new rules are being implemented stating this 'account' is held on trust by the company and those accounts are seperate from the 'Company accounts'.

B) The company accounts. Technically, the income for the company is (say) £17 (£1 each?). And this money would be distributed via dividend IF THE COMPANY IS LIMITED BY SHARES. Bizarelly, my flat management company is limited by guarantee and so cannot pay a dividend! In the latter, the only way of getting this money out would be via salary (presumably) of the ten members.

Worse than this, is also 'company' expenditure vrs service charge expenditure. For instance, what are these?
The company annual return cost (£15 or £30)?
The company accounts (£x)

Are these truly allowed to be charged via the service charge? The non shareholder flat owners don't (technically) need the company. It wouldn't matter (in theory) whether the land was owned by the company, the crown or Joe Bloggs.

If you took a technical view, virtually every RTE company in the UK is insolvent because the ground rent collected (either £Nil or £1 per flat) probably isn't even enough to cover the annual return costs.

[SeanC]

The ground rent income is taxable in the hands of the company. You can declare a dividend out of these post tax profits but you will need to issue a voucher stating the amount of dividend and the tax credit , so that memebers can put it on their tax return.

Yes, this is true and also a lot of work potentially requiring professional advice. You would be much better advised to retain any profits until they reach level where this would be worthwhile.

[jeffrey]

Agree with Gordon. Do distinguish between:

A) The service charge account for the 17 member. I understand new rules are being implemented stating this 'account' is held on trust by the company and those accounts are seperate from the 'Company accounts'.

B) The company accounts. Technically, the income for the company is (say) £17 (£1 each?). And this money would be distributed via dividend IF THE COMPANY IS LIMITED BY SHARES. Bizarelly, my flat management company is limited by guarantee and so cannot pay a dividend! In the latter, the only way of getting this money out would be via salary (presumably) of the ten members.

Worse than this, is also 'company' expenditure vrs service charge expenditure. For instance, what are these?
The company annual return cost (£15 or £30)?
The company accounts (£x)

Are these truly allowed to be charged via the service charge? The non shareholder flat owners don't (technically) need the company. It wouldn't matter (in theory) whether the land was owned by the company, the crown or Joe Bloggs.

If you took a technical view, virtually every RTE company in the UK is insolvent because the ground rent collected (either £Nil or £1 per flat) probably isn't even enough to cover the annual return costs.

All running costs of f/r company are within the service charge's scope.

[thevaliant]

All running costs of f/r company are within the service charge's scope.

I don't doubt you Jeffrey, but why is this? Because without the company the lessees (even if not members) would see a decrease in the valid of their flat?

[jeffrey]

I don't doubt you Jeffrey, but why is this? Because without the company the lessees (even if not members) would see a decrease in the valid of their flat?

No; it's because the lease [probably] says that the freehold reversioner's management/running costs are within the service charge scheme.
Of course, that's true only if the lease says so!

[Pearls]

Still more confused, I'm afraid, but my fault.

To clarify:
The service charges (or maintenance fees as we call them), on the other hand, arecollected separately by the managing agent and put into a client account on our behalf. The managing agent administers the maintenance side, including the accounts.

The only money which has entered our freehold company bank account is the ground rent.

So can I file a nil return for the freehold company or are we making a profit?

very many thanks
Pearls

[Pearls]

postscript

Sorry, I should have added: the managing agent takes his own management fees out of the maintenance fees (service charges).
Pearls

[jeffrey]

The service charges (or maintenance fees as we call them), on the other hand, arecollected separately by the managing agent and put into a client account on our behalf. The managing agent administers the maintenance side, including the accounts.

The only money which has entered our freehold company bank account is the ground rent.

So can I file a nil return for the freehold company or are we making a profit?

Unless an Accountant says otherwise, I'd see the incoming ground rent as:
a. a profit stream (so it's taxable); and
b. an asset needing to be disclosed in Annual Return to CRO.
Even if rent is not collected, I rather think that the mere entitlement to it exposes the Co. to taxation.

Solution (for Co. owned by collective lessees):
revise all leases to reduce ground rent to a peppercorn (= effectively, no money) and, if needed, extend them to 999yrs. too.

[thevaliant]

Unless an Accountant says otherwise, I'd see the incoming ground rent as:
a. a profit stream (so it's taxable); and
b. an asset needing to be disclosed in Annual Return to CRO.
Even if rent is not collected, I rather think that the mere entitlement to it exposes the Co. to taxation.

Solution (for Co. owned by collective lessees):
revise all leases to reduce ground rent to a peppercorn (= effectively, no money) and, if needed, extend them to 999yrs. too.

I would mostly agree with Jeffrey, except Annual Return should actually be 'Report and Accounts'. The Annual Return (form 363a) is something completely different.

I am unsure about collection though. If the company does NOT collect the ground rent, then it is not taxable income. I think their may be some long technical debate here (HMRC may try to enforce collection if it is worth their while - see below) but if the ground rent is low I doubt HMRC would intervene to force collection.

My understanding would be this:

1. Ground rent is taxable (though this is perverse for RTE companies - Imagine my situation - seven flats £1 ground rent each - Each year I pay £1 in, the company declares £7 profit - Pays tax on that at 21% = £1.47 and hands over to the government - The balance is dividend back to the member... the flat owners - So I've got to pay 21% of the ground rent per year to the government because I lease a flat? I don't think so! Imagine if we surrendered and regranted our leases with ground rent of £1m per flat).

2. Service charge income and expenditure is NOT taxable, EXCEPT the interest earned on the service charge account IS, split amongst the leaseholders. This goes on their self assessed tax return.

Net result - People who lease a flat are technically automatically on self assessment. People who lease a flat and have RTE also get the joy of filling in a CT600 (Corporation Tax return). Perverse, but there you go.

[jeffrey]

1. Ground rent is taxable (though this is perverse for RTE companies - Imagine my situation - seven flats £1 ground rent each - Each year I pay £1 in, the company declares £7 profit - Pays tax on that at 21% = £1.47 and hands over to the government - The balance is dividend back to the member... the flat owners.

No. A private company limited by guarantee and not formed as a trading entity is prohibited (by law, its Memorandum of Incorporation, or both) from declaring dividends to its guarantor members.