Freehold Company Limited by Shares - can shares be uneven?

Bookworm105

carl_h said:

Hmm.. many factors! We are also hoping that this can be run as a "dormant" operation to avoid Corporation Tax, so no profits or surpluses are created. I assume this is achieved by making sure everything that comes in can be safely accounted for. I believe this can be done in a "limited by shares" but HMRC have to be convinced. Is that right?

you believe wrong
dormant means there cannot be any transactions in the company's accounts (including its bank account) except for the fee due to Companies House for filing a set of dormant accounts. No receipts and no other payments through the bank account.

you said earlier that each director holds 25 shares each,  and as there is only one class of share with a nominal vale of £1/share, then the different amounts each person paid is not reflected in their respective shareholding otherwise each person would not have the same number of shares as the others.

I think you need to seek professional help because you really do not understand enough to be skating on the edge of what you want to do 

carl_h

eddddy said:

Won't the company be collecting ground rent and lease extension payments form those leaseholders who didn't participate in the freehold purchase?

Also, how will you enforce Service Charge payments on those that didn't participate, if it's not 'the company' that demands payment? Even if the current leaseholders voluntarily pay in some other way, if they sell, the new leaseholders might refuse to play ball.

Good points. We were attempting to follow HMRC advice as set out in this thread -
"Property management Limited company, is it classed as dormant for Companies House and CT?"
on the "GOV UK HMRC Community Forums". The MSE forum will not allow me to post a link. However this advice is not always clear to those lacking a financial background. We can waive ground rent. Service Charge payments are specified in the leases. I am new to this but a Management Company has been appointed that will collect charges & carry out maintenance. HMRC advice from the URL above says - "Service charges and contributions to sinking funds fall outside the scope of corporation tax as the landlord or payee is not beneficially entitled to these receipts." Regarding lease extension payments it should, I think, be possible for non-participants to get lease extensions at no more than the cost of legal fees, ie. the freehold company would not profit from this. For reasons I cannot discuss our lawyer did not finish the job, no fault of his own.

Grumpy_chap

carl_h said:

We can waive ground rent.
Service Charge payments are specified in the leases.

"Service charges and contributions to sinking funds fall outside the scope of corporation tax as the landlord or payee is not beneficially entitled to these receipts."

Regarding lease extension payments it should, I think, be possible for non-participants to get lease extensions at no more than the cost of legal fees, ie. the freehold company would not profit from this.

You really need to get professional advice and ongoing support on both legal matters and accountancy.
What appropriate professional experience do the Shareholders have?
How were the Directors appointed?
This is really advice that needed to be obtained prior to embarking on the journey to buy the Freehold.

The focus on making a dormant company seems to be the tail wagging the dog in terms of protecting the interests of the Freeholder.

Waive ground rent - that is generous unless it is "peppercorn" rent.

Service charges and maintenance / sinking fund may fall outside of Corporation Tax, but it can still be transactions through the company.  Plus, the funds need to be properly held separate from the Company funds - have you taken advice on the appropriate accounts for these funds and how they can be segregated from the assets of the company (in case of any claim by third parties)?

How will you fund block insurance etc?

I am amazed that you even countenance lease extensions at no charge other than legal fees.  This is giving away substantial assets that would benefit the Freeholder - typically one of the main benefits of being the Freeholder.  For reference, we extended the lease on our flat and the charge payable was £14k plus legal fees for both parties.  I do wish my Freeholder had not bothered with that £14k just to save having an active company...

You really need proper legal and accounting advice.
It is not clear that the individuals operating the Freeholder company have the knowledge to even ensure they do not fall foul of the law.

carl_h

"...dormant means there cannot be any transactions in the company's accounts (including its bank account) except for the fee due to Companies House for filing a set of dormant accounts. No receipts and no other payments through the bank account..."

The HMRC seem to have a different definition of "dormant". This is from one of the Advisors on the HMRC Community Forum -
"....Hi,
The company’s legal obligations to Companies House are completely separate to HMRC. We can only assist in respect of Corporation Tax.  For guidance please see below:

Link to "Set up and run a flat management company"

You will note that you must send a Company Tax Return no later than 12 months after the end of the company’s first financial year.  
We may then agree to treat the company as ‘dormant’ after, in which case Company Tax Returns wouldn’t be required for later years provided the company does none of the following:
•    allow directors who aren’t residents or leaseholders to be appointed in its articles of association
•    does more than manage the property in the interests of shareholders
•    make a profit
•    need to pay more than £100 in Corporation Tax in a year
•    get any income from land
•    pay dividends or other payments from profits to shareholders
•    own any assets it is likely to dispose of which would give rise to a chargeable gain
•    make payments that need to be taxed
•    When the company must always send a Company Tax Return
Your company must send a Company Tax Return every year if:
•    HMRC doesn’t write to confirm they think the company is dormant
•    the company starts doing any of the things in the list above, even if HMRC has previously said the company is dormant.
Thank you..."

eddddy

carl_h said:

We can waive ground rent.
...
Regarding lease extension payments it should, I think, be possible for non-participants to get lease extensions at no more than the cost of legal fees, ie. the freehold company would not profit from this. 

In simple terms, this is how freehold valuations and freehold purchases work. It's based entirely around investment returns:

• The freeholder is expecting ground rent income and lease extension income in the future

• Selling the freehold means losing that future ground rent income and lease extension income

• So the price of the freehold is calculated to be a lump sum payment to compensate for those future losses. (That's all a freehold valuation calculation is - compensation for future financial losses.)

So buying the freehold is like saying to the freeholder "I don't want to pay you for ground rent or lease extensions any more, so I'll pay you a lump sum of £x today instead".

To use the jargon, it's a calculation of discounted future cashflow.

(TBH, your process of looking at floor area of each flat to calculate a contribution wasn't really valid. You should really have done the above for each flat.)


So based on what you say, the participants have paid off the ground rents and lease extensions of the non-participants with a lump sum.  And you're not going to ask the non-participants to pay back the participants.


I guess that's a very kind act (of charity???), but do the participants realise that's what they're doing?

Will the participants be annoyed later, if/when they realise they've paid off other people's ground rent and lease extensions, and it's been decided that they won't get their money back?

Has this been explained to them? If not, they might feel that there has been some misrepresentation.

Bookworm105

carl_h said:

"...dormant means there cannot be any transactions in the company's accounts (including its bank account) except for the fee due to Companies House for filing a set of dormant accounts. No receipts and no other payments through the bank account..."

The HMRC seem to have a different definition of "dormant". This is from one of the Advisors on the HMRC Community Forum -
"....Hi,
The company’s legal obligations to Companies House are completely separate to HMRC. We can only assist in respect of Corporation Tax.  For guidance please see below:

Link to "Set up and run a flat management company"

You will note that you must send a Company Tax Return no later than 12 months after the end of the company’s first financial year.  
We may then agree to treat the company as ‘dormant’ after, in which case Company Tax Returns wouldn’t be required for later years provided the company does none of the following:
•    allow directors who aren’t residents or leaseholders to be appointed in its articles of association
•    does more than manage the property in the interests of shareholders
•    make a profit
•    need to pay more than £100 in Corporation Tax in a year
•    get any income from land
•    pay dividends or other payments from profits to shareholders
•    own any assets it is likely to dispose of which would give rise to a chargeable gain
•    make payments that need to be taxed
•    When the company must always send a Company Tax Return
Your company must send a Company Tax Return every year if:
•    HMRC doesn’t write to confirm they think the company is dormant
•    the company starts doing any of the things in the list above, even if HMRC has previously said the company is dormant.
Thank you..."

I will repeat and echo what others have said, you need professional advice, 
HMRC community forums are notorious for having technically inaccurate answers from low level staff who are not trained in the area they are answering. What they do is a quick google and repeat what they find, which often does not relate to the specific context of the question. In the instance you have found they have extracted from the following link as a quick answer. 

Dormant means different things for:

• HMRC Set up and run a flat management company - GOV.UK
• Companies House annual accounts and returns for Companies House 
  

Please appreciate the HMRC community form is operated by low grade staff who have little specialist knowledge, It is notorious for responses that miss the point or are technically incorrect because they do not read sufficiently far into the guidance before copying and pasting the first bit to the response and thus rather than offer an answer they offer a steer which the questioner then has to follow through on themselves

as the bit you quote (taken from HMRC link above) says 

• get any income from land
  

of course there are RTM companies that do not charge service charges ("get income from land") or pay insurance so are dormant, but that is because they have contracted those aspects out to a separate legal entity to do (or the leaseholders are happy to live in a building without ongoing maintenance or insurance) 

carl_h

...of course there are RTM companies that do not charge service charges ("get income from land") or pay insurance so are dormant, but that is because they have contracted those aspects out to a separate legal entity to do (or the leaseholders are happy to live in a building without ongoing maintenance or insurance)...

We aren't an RTM company. We bought the freehold outright. We have appointed a management company that will handle service charges & maintenance. We have a buildings insurance policy.

carl_h

@Bookworm105 The 8 bullet points in the list from the HMRC Community Forum describing what must not be done if Corporation Tax is to be avoided are taken directly the GOV UK page "Set up and run a flat management company". These are not points dreamed up by "low level staff who are not trained in the area they are answering". This is the official HMRC position. 

Bookworm105

carl_h said:

...of course there are RTM companies that do not charge service charges ("get income from land") or pay insurance so are dormant, but that is because they have contracted those aspects out to a separate legal entity to do (or the leaseholders are happy to live in a building without ongoing maintenance or insurance)...

We aren't an RTM company. We bought the freehold outright. We have appointed a management company that will handle service charges & maintenance. We have a buildings insurance policy.

carl_h said:

@Bookworm105 The 8 bullet points in the list from the HMRC Community Forum describing what must not be done if Corporation Tax is to be avoided are taken directly the GOV UK page "Set up and run a flat management company". These are not points dreamed up by "low level staff who are not trained in the area they are answering". This is the official HMRC position. 

bit confusing, who is paying the insurance? Freeholding company or the mgmt co?
if the former then it is not dormant as it will be making a "significant accounting entry"
if the latter, then yes the freehold company could be dormant in both HMRC and Co Hse terms since it has neither income nor expenditure (except the Co Hse fees paid from accumulated reserves, not a cash injection in that year)

I know, I posted that link, nonetheless I am making a general comment based on my experience of seeing responses on that HMRC forum 

Grumpy_chap

Bookworm105 said:

as the bit you quote (taken from HMRC link above) says 

• get any income from land
  

of course there are RTM companies that do not charge service charges ("get income from land") or pay insurance so are dormant, but that is because they have contracted those aspects out to a separate legal entity to do (or the leaseholders are happy to live in a building without ongoing maintenance or insurance) 

It is almost certain that the freehold company will "get income from land".  The shareholders might take the decision to waive annual fees but, sooner or later, a lease extension will be required somewhere and that will generate an "income from land".  The freehold company will also need to operate whenever the first flat is sold to agree the transfer of the lease.