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HMRC internal manual

Trusts, Settlements and Estates Manual

Trusts for particular purposes: flat management companies - S42 Landlord and Tenant Act 1987

Section 42 of the Landlord and Tenant Act (LTA) 1987 provides that contributions to certain variable service charge funds (and to sinking funds) in respect of residential property should be paid into a trust fund. Investment income arising to that trust fund is chargeable on the trustee at the trust rate or the dividend trust rate, as Section 42 LTA 1987 contains an implied power to accumulate. That was confirmed in a Special Commissioners decision in the case of CIR v Retirement Care Group Ltd.

FA07S/65 amended ITA/S480 so that income from service charges paid in respect of dwellings in the United Kingdom and which are held on trust are exempted from the charge at the trust rate and the dividend trust rate.

‘Service charges’ are defined as having the meaning given by section 18 of the Landlord and Tenant Act 1985. Because that Act only applies to England and Wales it is extended to include similar payments made in relation to dwellings in Scotland and Northern Ireland. The exemption applies equally to service charges held on trusts by Registered Social Landlords who are exempted from Section 42 LTA 1987 (see TSEM5740)

For 2007-08 and later years such income is charged at the standard rate. Where, as is normally the case, the income consists of bank  and bulding society interest, this will normally have tax deducted at source (see TSEM5712) and there will be no additional tax to pay.

From 2016-17 tax is no longer deducted at source and the trust will have to submit a tax return to account for this income.  If the total tax liability is less than £100, and the only source of income is bank and building society interest then no return is required, see HMRC Trusts and Estates newsletter April 2016 and HMRC Trusts and Estates newsletter December 2017 for further details.

In many flat management companies the LTA 1987 will not apply and so the tax treatment of the fund will depend on the general status of the fund.