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HMRC internal manual

Trusts, Settlements and Estates Manual

Trusts for particular purposes: flat management companies - funds not within S42 LTA 1987

Where a fund exists but it is not within Section 42 LTA 1987, for example where freehold owners of property decide to create a sinking fund, or because the landlord is an RSL or other ‘exempt landlord’, then the treatment of that fund will depend on what structure is used.

An individual holds the funds

The individual could be an employee, could be trading as a maintenance contractor or could hold funds as trustee for the freeholders. If the last then the type of trust depends on the terms of the trust, not on Section 42 LTA 1987.

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A company holds the funds

Assuming the company was formed to hold funds for the freeholders who created it, it could hold the funds as trustee. Alternatively it could trade as a flat management company receiving payments under a contractual arrangement to supply services and pay corporation tax. The status of the fund will depend on the terms under which the payments are made and the terms under which the company holds the funds.

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A trust holds the funds

It could be any type of trust depending on the terms of the deed but it would not be within Section 42 LTA 1987.

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An unincorporated association holds the funds

This could, for example, be a residents’ association. It would be liable to corporation tax unless it was acting as a trustee. Again any trust would not be within Section 42 LTA 1987.

Any funds that the trustees held would be subject to the normal trust rules. It is possible for the funds to be held under a bare trust, interest in possession trust, discretionary trust or accumulation trust arrangement. The exact status will depend on the terms and nature of the trust agreement.

Where service charges are held on accumulation or discretionary trusts the income received (usually bank interest) will be liable at the rate applicable to trusts in the normal way for years up to and including 2005-06. However, for 2006-07 ICTA/S686 is amended so that income received by a relevant housing body (a term that includes registered social landlords) is not liable at the special trust rates. See TSEM5752 for a list of all the bodies falling within the definition of ‘relevant housing body’.

For 2007-08 onwards the legislation was again amended to extend the relief given to RSLs to all landlords holding service charges on trust (see TSEM5710). As a result the specific exemption for RSLs was repealed.