Freehold company - selling part of the freeholder's land

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  • Freehold company - selling part of the freeholder's land

    I live in a small block of flats. The leaseholders jointly own the freehold, via a Company Limited by Guarantee. That is, each of the leaseholders is a member of the company, and the company owns the freehold. The only thing the company does is to collect and manage the service charges. We've told HMRC that the company is dormant.

    One of the leaseholders wants to add part of the freeholder's land to his lease, for a suitable price (probably a few thousand pounds). This land isn't currently leased to anyone.

    We want to either
    (1) Distribute the money amongst the freeholders, or
    (2) Add the money to the service charge pot.

    Ideally we don't want to change the company's dormant status, and we don't want to incur corporation tax.

    What's the best way to deal with this?

  • #2
    "Dormant" is not the same as "non-trading". Not sure the company should have dormant status if it is collecting a service charge and, presumably, paying sums out for maintenance. The grant of a lease at a premium will certainly be a transaction which will require the company to file normal accounts. There may be a way round it, but the fees you will have to pay to learn what it is and do it will probably exceed the premium. Tax will be payable just as it would be by a trading company.

    I think what you need to do is to work out what it is going to cost to give up dormant status* and, taking into account the tax and fees you will have to pay, see if it is worth it.

    *Of course if the company should not be dormant you can take that cost out of the equation.

    Comment


    • #3
      Companies House requires registered companies to file accounts every year and the company can submit " dormant status" accounts if it has no reportable income or losss for the year.

      Normally freehold companies ( owned by leaseholders ) will become dormant if it ceases to collect ground rent. The service charge account is treated as trust account because the funds held belong to the leaseholders and does not belong to the company .

      You need to consult an accountant to see if the sale proceeds can be treated as return of capital to shareholders and not as profit subject to company tax.

      Comment


      • #4
        Originally posted by Gordon999 View Post

        Normally freehold companies ( owned by leaseholders ) will become dormant if it ceases to collect ground rent. The service charge account is treated as trust account because the funds held belong to the leaseholders and does not belong to the company .
        That's not strictly correct. Collection of ground rents are significantly small in number and a value of transaction that still qualify the company to file as dormant.

        However it is strictly incorrect to do so as the landlord- the ManCo here- is incurring considerable costs for which it is liable and should not therefore file as dormant, as it is a common mistake to treat the SC and expenditure as isolated from the company- the latter is not.


        With A Guarantee company as the GR funds cannot be distributed you need to file accounts to incorporate the income and disperse them on expenditure.

        Trustee tax is due on SC investment income, dormant or not.

        As to the sale of the land might you agree that he pays for say external painting next year instead?
        Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

        Comment


        • #5
          Originally posted by leaseholdanswers View Post
          As to the sale of the land might you agree that he pays for say external painting next year instead?
          That would work from our point of view - we're likely to have expenditure that exceeds the value of the land. Is it legal to do this and not declare it, though? To my inexpert ear it sounds like a payment in kind.

          Comment


          • #6
            Originally posted by leaseholdanswers View Post
            However it is strictly incorrect to do so as the landlord- the ManCo here- is incurring considerable costs for which it is liable and should not therefore file as dormant, as it is a common mistake to treat the SC and expenditure as isolated from the company- the latter is not.[/I]
            Certainly my professional institute (and others) aren't sure themselves on the matter:
            http://www.icaew.com/~/media/Files/T...-accounts.ashx

            Although I must admit to a slight concern whether treating the company as dormant is right. After all, if the gardener wasn't paid and sued, who would he sue?

            Anyway, assuming you have taken the view that the RMC company is dormant and all monies are held under trust:

            The sale/assignment of part of the land not subject to lease (and assuming it won't prevent anyone accessing part of their own leased property) would presumably be a gain in the RMC.
            This would:
            1. Be subject to capital gains tax
            2. Make the company (for at least that year) non-dormant

            Comment


            • #7
              Valiant that is not entirely correct as a dormant company can still make transactions and be dormant. As mentioned a few ground rent receipts, the accountants fee and the AR will pass that test

              Anything more that a few flats and the argument for dormancy becomes very very thin...

              What you have touched on and I mentioned earlier is that while all the SC is held on trust, it still has custody of these funds, and the expenditure, such as the gardener as you say, are the landlords liability and are not involved in the trust ( only the defraying income is).

              It is my view that dormancy is often wrong but just quietly ignored as most of these companies are mutual or close companies. If a company makes a thumping great loss on a Daejan like scale with Section 20, questions will be asked!


              The annual surplus is not subject to CT or CGT but the sale of the land and investment income are.

              As to how you treat that depends on expenses on the building if you can offset that against the sale ie we sold the land to pay for the painting.

              Valiant is in a lot better place to suggest options on that than I.
              Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

              Comment


              • #8
                According to Companies House:

                A company is dormant if it has had no 'significant accounting transactions' during the accounting period. A significant accounting transaction is one which the company should enter in its accounting records.

                When determining whether a company is dormant you can disregard the
                following transactions:

                • payment for shares taken by subscribers to the memorandum of
                association;

                • fees paid to the Registrar of Companies for a change of company
                name, the re-registration of a company and filing annual returns; and

                • payment of a civil penalty for late filing of accounts.


                When the question was raised on another site about whether a tenant owned management company is dormant if there is active management "on behalf of" the company it was decided it was a bit of a grey area. However, as LHA says, no one is going to get too excited if the company is no more than a vehicle to enable the freehold to be held collectively or to facilitate management.

                Comment


                • #9
                  Regrettably, I'm an accountant, rather than a tax expert. I think:

                  1. The gain would activate the company for both tax purposes and Companies House purposes (you can be 'non trading' for tax and not be dormant and vice versa).
                  2. This gain is a chargeable gain (I think) and taxed at whatever rate of Corporation tax would be appropriate for the company (20%, 26% or the marginal rate).
                  3. The only allowable 'costs' to offset it would be the cost of acquiring the land, which could be very difficult to work out if you are selling part.

                  Afterwards, you're left with a stack of cash in the Company which:
                  1. I don't think can technically be used for service charge expenditure (due to it being held on trust by the company)
                  2. And you can't dividend it back to the members because of 'Limited by guarantee' problem.

                  I suspect, in these situations, certain laws and tax rules are conveniently ignored by RMCs in this position............

                  See a tax accountant.....

                  Comment


                  • #10
                    Originally posted by thevaliant View Post
                    1. I don't think can technically be used for service charge expenditure (due to it being held on trust by the company)
                    Sorry to say this for the third time but that is wrong and its a common mistake.

                    Only service charge income is held in trust. landlords expenditure is not nor is it governed by those principles. Sale of land is not a SC income.

                    The landlord is free to do anything and spend money in legal and lawful ways and under the contracts that he is a party to to.

                    It is only if he seeks to recover money that he is governed, in the main, by the LTA 1985 as heavily amended.
                    Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

                    Comment


                    • #11
                      Originally posted by leaseholdanswers View Post
                      Sorry to say this for the third time but that is wrong and its a common mistake.
                      That's excellent to know. So it could be used to fund the painting (or whatever) which surely is a bonus to everyone. Presumably this expenditure could then be used to offset the gain then.

                      Comment


                      • #12
                        Originally posted by thevaliant View Post
                        That's excellent to know. So it could be used to fund the painting (or whatever) which surely is a bonus to everyone. Presumably this expenditure could then be used to offset the gain then.
                        No my point was that any expenditure is not subject to a trust ( unless of course one is in place) only the SC income is, whether under a trust or as is most common, by statute.

                        As I understand it the sale of an asset can be accounted for against expenditure and any residue subject to CT, rather than CGT, if it is treated as a sale to another in a close or mutual company.

                        The trick is to avoid any surplus on the day to day expenditure ( which is not normally subject to either as a close or mutual company) being hit by this.

                        Given the likely value of the land in the uplift in the value of the flat to which it will be attached, the £400 to £600 for advice and basic accounts are likely worth it.
                        Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

                        Comment


                        • #13
                          Thanks for the advice everyone.

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