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HMRC internal manual

Property Income Manual

Income chargeable: flat management companies


Flat management companies should calculate their profits in accordance with GAAP, subject to any adjustments required or authorised by legislation. This means that any rents or other income received from tenants are generally taxable as property income. This will not be the case if the amounts received are capital (PIM2040) or for certain receipts which fall within Section 42 of the Landlord and Tenant Act 1987.

Section 42 of the Landlord and Tenant Act 1987

Under Section 42 of the Landlord and Tenant Act 1987 contributions to certain variable service charge funds and to sinking funds in respect of a resident property should be paid into a trust fund.

For the purpose of LTA87 service charges include:

  • any amount payable by a tenant as part of or in addition to rent which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management and,
  • the whole or part of which varies or may vary according to the relevant costs.

The service charge funds should be set at a level which leaves a “no surplus-no deficit” situation at the end of the year, though in practise there may be a small reserve remaining. For example, if part of a tenants rent is allocated to repairs this would be classed as a service charge if the amount is variable but simply part of the rent payable if it is a fixed amount.

Sinking funds involve the long term setting aside of funds for major repairs and renewals and over time this fund can accumulate and generate investment income.

Service charges and contributions to sinking funds received by a flat management company fall outside the scope of corporation tax as the landlord (or payee) is not beneficially entitled to these receipts. Therefore, this income falls under LTA87/S42 and is received as capital in the payee’s capacity as a trustee.

If any investment income arises on these sums the trustees have the normal obligation to notify chargeability and tax is chargeable on the trustee at the rate applicable to trusts.

Any rents received are outside the scope of LTA87/S42 and remain taxable as property income.

LTA87/S42 does not apply if the funds are paid by freehold owners of a property or if the landlord is an exempt landlord.

Further details can be found here.