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.


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