Can I charge fees for managing my son’s properties?

by Readers Question

8:56 AM, 23rd July 2018
About 5 months ago

Can I charge fees for managing my son’s properties?

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Can I charge fees for managing my son’s properties?

I used to own 8 rental properties in central London, which I have been managing myself for the last 35 years, even though I live abroad.

All properties, but two, have been gifted to my 25 year old son, who is studying full time in the UK. For the first time in the 2018/19 Tax year my son will be paying taxes on about 180K yearly gross rental income as s 24 starts to bite.

I was wondering if I could charge him, say 10-12% management fees/or a set wage for the next five years in order to reduce his tax burden until he assumes full management of his own properties.

I thought of this ‘services’ ( or wage ) option as it is completely true and valid and a simple way of reducing his tax burden without entering into a company formation or partnership. I will be paying increased tax on my UK rental income( on the remaining 2 properties) once this ‘services/ wage” amount is added, but it would not be as high as his.

We already have a joint business account in which all rents and expenses are going through and therefore, there is no problem for me to continue managing his properties as I have always done in the past when they were mine.

I would welcome any thoughts on this.

Thalia



Comments

Neil Patterson

9:22 AM, 23rd July 2018
About 5 months ago

Hi Thalia,

It sounds like you may already be running a business/partnership so dependent on many factors it may be possible to look into incorporating or at least working out both your tax affairs more efficiently.

I would definitely recommend you consider a tax consultation with Mark Alexander and with the satisfaction guarantee you have nothing to lose 🙂 Please see >> https://www.property118.com/tax/

On the substance of you main point in order to earn PAYE or invoice for services either way would need to be set up properly as a business.

THALIA K

10:45 AM, 23rd July 2018
About 5 months ago

Reply to the comment left by Neil Patterson at 23/07/2018 - 09:22
Thank you for your response. I do intend to book a consultation. But before this, I need to tell you that lenders already regard us as 'self employed in the rental business' without us ever having gone through all the formalities of setting up a business properly, which I suppose means to register the business with HMRC ( ?). Both my son and I submit separate Accounts for our Rental Income. Neither of us receives any other income. It seems to me that all I have to do now is issue him with an invoice for managing his properties and get the monies from his account. Then deposit it into my own personal account and declare it to the IR. Is this too simplistic? Will the HMRC accept this as legitimate expense for him? Please forgive my ignorance.

sam

11:09 AM, 23rd July 2018
About 5 months ago

My accountant tells me that if you actively manage your BTL portfolio (esp full time) then it may be considered a business rather than an investment. This means that the portfolio can be passed on to your direct descendants out side of the IHT net after 2 years.

THALIA K

15:33 PM, 23rd July 2018
About 5 months ago

Reply to the comment left by sam at 23/07/2018 - 11:09
I am following up on my first post. This is what I have found from Gov.uk .
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2210.
''A landlord can’t deduct anything for the time they spend themselves working in their own rental business. They can deduct any wages or salaries they pay to their spouse, civil partner or other relations for working in the rental business provided the amounts paid represent a proper commercial reward for the work done. The spouse, civil partner or relative will be taxable on their earnings if their income is large enough. The landlord will need to operate the PAYE and NIC systems on payments to employees.''
So it appears plausible that my son will pay me a salary to manage his properties and pay my NIC as well. Am I correct in this?

sam

20:05 PM, 23rd July 2018
About 5 months ago

I would think thats correct under separation of legal identity - you are not the owner. However, because of the father - son relationship, be reasonable and be prepared to justify the amounts paid on arms length basis.

Cathie Hawkins

20:49 PM, 23rd July 2018
About 5 months ago

We had trouble with HMRC after our accountants recommended that we charge ourselves Management fees. No monies actually changed hands and that seemed to be the bit they were unhappy with. Our accountants were being charged with fraud which I think is why it came to light!

THALIA K

5:09 AM, 24th July 2018
About 5 months ago

Reply to the comment left by Cathie Hawkins at 23/07/2018 - 20:49
Oh dear! I wouldn't want anyone charge with anything! Money will actually change hands in our case, as I have a separate personal account in the UK, where all my other rental income goes. And of course I will even charge a lot less than a managing agent does for central London, i.e. about 15-17%.
However, I have one more question:
As I live abroad, will my son still need to operate the PAYE and NIC systems in my case?

Gary Nock

8:16 AM, 24th July 2018
About 5 months ago

Previous posts are correct in that you cannot charge yourself for managing your own properties. However if they are now owned by your son you can quite legitimately charge him for managing them. However be aware that if you let the properties for him and fall into the category of a Letting Agent then you will need to be legally compliant to do that. This includes membership of a redress scheme, and from next April client money protection which also means professional indemnity insurance. If you don't let them but just manage them you will still need membership of a Property Redress Scheme as a minimum.

AA

10:32 AM, 24th July 2018
About 5 months ago

And you have to be mindful of whether you are self-employed or employed.


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