Ground rent - is it profit?

[jeffrey]

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.

Again, no. Technically, and only so far as I recall:
a. service charge is an income deriving from land; and
b. it therefore should be seen as profit and so taxable (= the old "Schedule A"); but
c. taxpayer company can of course offset against it all allowable outgoings (cost of providing the services); so
d. by extra-statutory concession, HMRC will not levy tax provided that there is no element of profit in the level of service charge demanded and collected from the leaseholders served by it.

Yes, bank interest accruing (on money held by co., whether re ground rent or service charge) is taxable, though.

[thevaliant]

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.

Ture but (and we are getting far too technical):
1. Not all RTE companies are limited by guarantee AND
2. Even if no dividend were declared, the income is still taxable income for the company, which doesn't remove the need to file a CT return and pay tax on that profit. Indeed, dividend back to yourself (if limited by shares) would incur FURTHER tax if the lessee/member was a higher rate tax payer!
3. If no dividends could be declared, how does this income get back to the members? (Yes, you can use it to pay 'salaries' I suppose, but that's more tax and more fun).

I suppose what I'm trying to drive at is the farcical setup an RTE company can place a person in (like me) if you play it by the book:

I am employed. I pay tax at the basic rate. All my income is under PAYE. I receive no interest on savings because I have no savings (and even if I did, I'm still a basic rate payer, so it would be swept up automatically by the bank). Therefore, I don't have any administrative tax burden on me. Then I bought a flat with a RTE company as landlord. Suddenly I go from being a PAYE employee with no need to file in a tax return to:
1. Having to do so for the service charge earned interest that *I* pay in AND
2. Having to complete CT600 forms for the ground rent the RTE company 'earns from it's sub tenants AKA the landlords?'.

[thevaliant]

Again, no. Technically, and only so far as I recall:
a. service charge is an income deriving from land; and
b. it therefore should be seen as profit and so taxable (= the old "Schedule A"); but
c. taxpayer company can of course offset against it all allowable outgoings (cost of providing the services); so
d. by extra-statutory concession, HMRC will not levy tax provided that there is no element of profit in the level of service charge demanded and collected from the leaseholders served by it.

Yes, bank interest accruing (on money held by co., whether re ground rent or service charge) is taxable, though.

Agree completely with the above. I did mean the bank interest earned is taxable, not the service charge income itself. Sorry.

[Pearls]

further two queries

I am self-employed, so do I put the "dividend" income on my own tax return as well even though the Freehold company has already paid the tax on it?

Finally, will our Freehold Company need to file a Corporation Tax Return?
What is Corporation Tax?

Pearls

[thevaliant]

I am self-employed, so do I put the "dividend" income on my own tax return as well even though the Freehold company has already paid the tax on it?

Finally, will our Freehold Company need to file a Corporation Tax Return?
What is Corporation Tax?

Deep down, you don't really want to play it by the book. But this depends on how much is a 'small' profit (from Post #1):

The COMPANY has made a profit, of the ground rent collected. Let us say it is £1 per year. You have seventeen flats, and ten shareholders.

Company Income - £17
Corporation tax return to complete - Form CT600 - Download it from:
http://www.hmrc.gov.uk/ctsa/ct600-short-2007.pdf

Tax to pay @ 21% (small companies rate) = £3.57

Balance remaining: £13.43
Dividend to ten members = £1.34 each (THIS IS WHAT YOU PAY YOURSELF) (now, there is an associated tax credit given... 10%- Various forms from Company need to be completed and passed to members) - Figure grossed up by 10% to £1.47.
Put THAT £1.47 on your PERSONAL self assessment tax return and pay tax at 32.5% (net impact is 25%, but HMRC can't *SAY* that, it'd put us accountants out of a job - why make life simple, when it can be made HARD!).

Tax to pay personally therefore £0.48.

So let's put this in perspective:
Lessees pay in £17 for ground rent.
HMRC take £3.57 for Corporation Tax AND
£4.80 for Dividend tax (though this may vary depending on tax banding of 'shareholders' - might be £nil)

Balance left to TEN members who paid in £10 = £8.63
You actually LOSE money!

This is why I have realised owning a lease on a flat where f/r is held by members management company is actually perverse. You end up paying government for privalege of living in a flat which would not be true if you owned a house.

[jeffrey]

This is why I have realised owning a lease on a flat where f/r is held by members management company is actually perverse. You end up paying government for privalege of living in a flat which would not be true if you owned a house.

Not if the rent is a peppercorn. Al it takes is one Deed per flat, which can usefully also increase term length and tidy-up covenants.

[thevaliant]

Not if the rent is a peppercorn. Al it takes is one Deed per flat, which can usefully also increase term length and tidy-up covenants.

Agreed! Though I doubt my fellow lessees even know about our problem and certainly none would be willing to pay a solicitor to draw up this deed. £1 per year for seven flats. I take the risk... I don't tell the Revenue! -Prison for me

[jeffrey]

But it's worth the cost of new (replcement) leases if:
a. the terms ned extending anyway; or
b. the covenants need updating (esp. so as to oblige L to enforce lessees' covenants).
As the freehold reversipon is effectively owned by only ten of the seventeen flats' leaseholders, the dissident seven would have to pay a premium for leasehold extensions- which would alleviate the unpopularity of the legal fees- and the f/r co. would not pay any fees itself as all lessees participating would pay equal shares of the global costs.