Creating own property management company to save tax

by Readers Question

10:44 AM, 8th February 2017
About 2 years ago

Creating own property management company to save tax

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Creating own property management company to save tax

I currently self manage my 15 buy to let properties in the Greater London region. I want to legitimately reduce my property income so was thinking of creating a property management company whereby I transfer 6% of the annual rent as a service fee to the property management company. I am happy to create monthly invoices etc to show this as being an arms length transaction. I do not need the money so am happy to leave it sitting in the property management company (or maybe withdraw c. £5k a year as dividends).open business

Have any of the other readers done something similar? My only concern is that HMRC may challenge this arrangement given I am only managing my own properties and not anyone else’s. I also make a lot more money from my full time employment income than I do from property income. Transferring property to my wife is not an option as she is in the same situation (multi property owner who makes more from employment than from property).

I would be open to suggestions

Azim



Comments

Mark Alexander

11:23 AM, 8th February 2017
About 2 years ago

Hi Azim

Yes this is a relatively common tax planning method. Sadly though, most people who use it do so incorrectly and find the arrangement invalidates future claims for incorporation tax relief on the basis that the "business" sits with the management company and the properties become a "passive investment". This needn't be the case.

Given what you have explained I am extremely confident that I can assist you with your future planning but an open forum isn't the right environment to have open and detailed discussions about personal finances.

Please book a private Consultation with me, which comes with a total satisfaction guarantee. I am very happy to include your existing professional advisers in any discussions and correspondence we have. If you are not entirely happy with the service I provide, simply tell me why within 30 days and I will refund your fees in full, regardless of whether I agree with you or not. I can't say fairer than that can I?

To book Consultation time with me please see >>> https://www.property118.com/optimal-tax-planning/91857/
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Heather G.

12:32 PM, 8th February 2017
About 2 years ago

In what part of Greater London do you operate? Could you use your network to find a landlord in your area who would be interested in having you take on their property management so that you could ligitmately claim that you are operating as a business?

Mark Alexander

15:10 PM, 8th February 2017
About 2 years ago

Reply to the comment left by "Heather G." at "08/02/2017 - 12:32":

Hi Heather

In order to manage other peoples properties Azim would have to register with a Property Redress Scheme and to qualify he would have to purchase professional indemnity insurance.

If that's what he wants to do then fine, however, I get the distinct impression is far more tax related. A company which manages a portfolio of 15 properties for its sole owner is still a business. However, therein lies the problem I referred to in my initial reply. Splitting the business away from the property investment is a bad idea for tax planning purposes on a stand-alone basis, especially if there are any plans to incorporate the entire "business" and claim incorporation relief to mitigate SDLT and CGT at a later date.

I do have the answer/solution and willingly share this with my paying clients - see >>> https://www.property118.com/optimal-tax-planning/91857/
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Sean Graveney

15:20 PM, 8th February 2017
About 2 years ago

If you want to legitimately reduce your property income then you could just reduce your rents ?

Mark Alexander

15:27 PM, 8th February 2017
About 2 years ago

Reply to the comment left by "Sean Graveney" at "08/02/2017 - 15:20":

Dream on Sean!
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Gary Nock

18:48 PM, 8th February 2017
About 2 years ago

Azim I tried this one and HMRC via my accountants would not allow it on a sole trader basis. If you or your partner own the properties and also trade as a property management company as a "sole trader" then they will not allow you to charge yourself for management.

However if you set up a property management limited company then that company can legitimately charge you for property management as it is a separate entity.

To reduce your property income and avoid any Section 24 issues you could charge the market rate for management - which is anything between 8% and 15% of the rent. Bear in mind you will need to set up a limited company and submit annual returns etc. Accountants may charge you up to £1500 a year to do this. To avoid any accusations of "tax evasion" then if you let or manage another couple of properties from other landlords then that will keep HMRC and your accountant off your back.

Hope this helps.

Gary

Mark Alexander

19:51 PM, 8th February 2017
About 2 years ago

Reply to the comment left by "Gary Nock" at "08/02/2017 - 18:48":

Better still if the Limited Company owns a stake in the beneficial interests in the property and the individual and the company are joined together via an LLP. This opens up several further tax planning opportunities which, with careful planning, can be extremely effective.

As you might expect, there are many pitfalls, but providing you follow the right map you can avoid them all.

No need to manage properties for third parties on this basis either.
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Jon D

8:43 AM, 14th February 2017
About 2 years ago

Note that you mention "transferring a fee to the mgt co." but in reality you should draw up new ASTs in the Ltd Co. name and the Ltd Co. will earn the rent as income.

It would then pay you the rent minus 15%, you invoice the co. Note also that it may subtract other expenses, especially VAT applicable invoices, where you will be able to reclaim VAT if the co. is VAT registered.

You can continue to claim other expenses in your personal name, as you see fit. So you would have a mix of expenses in co./personal. No problem. Note that, for example, a service charge would normally be in your name and continue to be so. (Your leaseholder may frown at changing the name on the invoice to a co. name and there is no tax advantage. You would also be revealling more info to them than they need to know.)

The co. could also manage the properties of another customer i.e., your wife, which helps to meet the criteria that it is a trading lettings agency and not a wheeze.

As

8:40 AM, 20th October 2018
About 2 months ago

Hi
I am trying to establish the lawfulness of using the structure mentioned by Azim and have reviewed the terms and conditions of one of my HMO mortgages. Within the general conditions, it does talk about a couple of things that gives me a cause of concern:

The Contracts (Right of Third Parties) Act 1999 does not apply to the Agreement. This means that anyone who is not a party to the
Agreement will have no rights under that Act in relation to the Agreement.

By transferring the beneficial interest of the property into a BICT for example does that amount to transferring it to a 'third party', given a Limited entity is a separate legal person in its own right?

Secondly, it takes about Management Companies:
If you own the Property on terms which allow you to hold shares in a management or resident’s company, you agree to give us
your share certificate or membership certificate when we ask you to do so together with a share transfer form and allow this to be
transferred to us so that if we need to repossess the Property or sell it, we can transfer your shares or membership to any person
to whom we have sold the Property under our power of sale. We may receive consideration for any such transfer. We may exercise
any voting rights as a result of our having taken possession of the Property.

Would the above clause mean that the lender does need to be advised of the split of the beneficial interest from its legal owner which would allow the lender to register a fixed charge on the property's beneficial interest held by the company?

I would be very grateful of any steer on these questions, and whether they present any 'issues'?

Regards

Mark Alexander

9:46 AM, 20th October 2018
About 2 months ago

Reply to the comment left by As at 20/10/2018 - 08:40
Given that BICT is a process as opposed to an entity I do not understand what you mean when you say transferring beneficial interest in property “into a BICT”, please explain.

Also, I do not see any mention of transferring beneficial interest in Azim's post. That was a suggestion made by me further into the discussion thread. It was merely a suggestion for consideration, not advice, because the full facts are unknown and a forum is not the place to get into that level of detail.

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