Limited company tax liability (small management company)

[TonyRPH]

We own a flat within a small block of 9 flats.

The owners (leaseholders) are also the freeholders, and are all directors of the (self managed) management company.

I have been told (casually, not officially) that "the monthly service charge is kept low so as to avoid tax".

I assume this is to avoid paying tax on any remaining monies after running costs - would this be a correct assumption?

I am waiting on a copy of the accounts (3 weeks now...), so I have no further information - however does this sound feasible or even legal?

Thanks.

[anonymous-user]

Sounds like nonsense to me.

If there are no cash reserves I'd be concerned about the lack of a "sinking fund" to cover the inevitable big bills that turn up from time to time.

What often happens is one or two owners are short of cash and kick up a stink every time they have to think about funding for the longer term. And then, when a big bill arrives, they say they can't pay and either everybody else has to cough up more or the building starts to fall to rack and ruin. At which point flat values fall and people are even more reluctant to spend money - and so the vicious cycle continues. Then next thing you know some potential buyer can't get a mortgage because the building's in disrepair and the trouble really kicks off - with unsaleable flats.

You're much better off in a properly managed development building that costs a bit of money every year than in a development with a "cheap" service charge that's not properly looked after.

[TonyRPH]

rockin said:

Sounds like nonsense to me.

You echo my thoughts and concerns.

There are a couple of minor maintenance issues that are evident already.

3 of the flats are rented, and at least one landlord doesn't seem to care much about the condition of is property sadly.

[bigles]

Speaking both as an accountant and Co Sec of a residents management company (As soon as anyone realised I was an accountant, I was tasked with the accounts..).

In our case, where the company owns freehold and we are all shareholders and directors (similar to yours I guess), the service charges surplus/deficit isn't chargeable to Corporation Tax, nor is any sinking fund contribution. (Technically they are held under trust for the individual leaseholders, the company is just acting on your behalf, see HMRC own guidance https://www.gov.uk/hmrc-internal-manuals/property-...

The only potentially taxable income is any investment income (eg; interest/dividends) gained on any sinking fund value invested in the meantime - probably not an issue for you though unfortunately.

Think I'm in agreement with the comments above tbh.- more likely to be an issue with willingness to pay for upkeep.
(Speaking as someone who got a good deal as there was likely to be maintenance needed in future years, we're on that process now over a few years, but it does need everyone on board - with the changes in leaseholders/owners, we're there now thankfully).

[TonyRPH]

bigles said:

Helpful stuff

Thanks for this, very helpful.