Have any forum members any experience of registering a ‘flat management company’ with the Trust Registration Service where there are a large number of flats and the income from service charges held in trust is sufficient to require registration? The issues I can imagine giving rise to problems are (1) the fact that each lessee is seen as a settlor and (2) HMRC’s current view on what is settled.
Ray Magill
You mean a RTM company? Or a company that happens to manage a block of flats?
Typically the company that owns the freehold of a block of flats will collect the service charges, which it then holds as trustee. It is that trust that I have in mind. But of course the freeholder might delegate the task to a management company. HMRC have used the term ‘flat management company’, when they actually mean a trust handling service charges under s.42 Landlord and Tenant Act 1987, for example.
Hi Ray,
I see. The monies paid by the leaseholders must be paid into a trust bank account (three options in real terms, bank, EU bank or building society) see s.391 held by the landlord. The landlord is the ultimate beneficiary should the trust be wound up.
The interest MUST be reinvested; so, we would assume the tax on the interest would fall onto the landlord – it maybe the case the lease allows expenses, should the tax burden become an issue.
Perhaps the forum has a view on how trust bank accounts are taxed?
Richard Bishop
PFEP
Ray, sometime ago I came across this which apparently arose from I believe an HMRC webinar:
" What details do we provide for a Flat Management Company?
The settlors are the leaseholders who make the payment under S42 LTA 1987. We appreciate that the number of settlors that can be shown on the form is limited, so the details of the additional settlors can be provided to HMRC in writing.
The amount settled will be the cash paid under S42 LTA 1987.
The beneficiary is likely to be the property in question, which can be recorded under the beneficiary type ‘Other’."
Malcolm Finney
The trustee receives the service charges, which may result in it holding sufficient funds to generate taxable income. Conceivably a capital gain might be realised as a result of investing the monies held in a sinking fund. The income is chargeable at basic rate. The trust is liable for CGT in the unlikely event that it has a chargeable gain, and probably would have an annual exemption of the minimum trust exemption. The trust would be relevant for inheritance tax purposes. I imagine that HMRC would normally be happy to assume no liability at the ten year anniversaries.
Hi Ray,
The trust under s.42 is defined in the legislation,
“trust fund” means the fund, or (as the case may be) any of the funds, mentioned in subsection (2) below.
It would be not taxed under the relevant property regime. It’s an implied trust. As above: CGT etc is not applicable as the funds must be invested in a “interest bearing” account.
My view anyway.
Richard Bishop
PFEP
I agree that capital gains can’t readily arise on an interest-bearing asset.
As to the form of trust, as there are successive interests held by the lessees and the landlord, I thought this to be a relevant trust.
Ray Magill
The trustee receives the service charges, which may result in sufficient funds to generate taxable income. Conceivably, just, a capital gain realised as a result of investing the monies held as a sinking fund
Commenting somewhat late in the day to Malcolm’s quote, HMRC say ‘the amount settled will be the cash paid under s.42 LTA 1987’. If ‘cash paid under S.42’ means the service charges, that would mean that each payment represents fresh capital added, which is absurd. Clearly to talk of capital being settled is inappropriate language. If the Act didn’t contain the ‘tontine’, one would probably have a bare trust.
An added aspect of these trusts is that they are settlor-interested, with the consequence of a GROB for each settlor/lessee! Amending legislation is desperately needed, rather than rely on Revenue practice on the basis of the figures generally being trivial.
Thanks, Richard, I recall reading that article at the time. Of course, it doesn’t mention inheritance tax, not is it very clear about the nature of a ‘S.42 trust’. And the income is now subject to basic rate tax.
It is also strangely silent about the law in Scotland and Northern Ireland.
Ray
Hi Ray,
s.156 Commonhold and Leasehold Reform Act 2002 added 42(a) to s.42 of the 1987 Act, it is slightly more clear!
With the 2002 reform; service charges and sink funds ought to be administered through a company, the bank account must not be in the company name and written confirmation is required that the bank acknowledges the account is not connected with the company. I see the reasoning for the above, if the company went into liquidation it would drag the account along with it.
RICS Code of Practice Service charge residential management Code and additional advice to landlords, leaseholders and agents (page 26) as some detail on the trust fund.
Richard Bishop
PFEP
Thanks, Richard.
The RICS Code of Practice is very thorough, but says nothing new about the tax consequences for ‘S.42 trusts’. The tax and accounting treatment of service charges in commercial leases, as well those residential leases outside S.42 LTA 1987 is also worth exploring. I expect that any trusts arising will generally be bare trusts; the balances on which may not always be recognised when relevant. And most if not all will now have to be registered.
Oh, happy days!
Ray
y
Badly drafted legislation. Nothing new.
Richard