Setting up a Management Company make sense?

Hi Steve,

Yes you can set up a management company and pay all the relevant taxes and accounting costs and subs to a Redress scheme etc.

However, you have to be very careful not to fall foul of HMRC transfer of income stream rules and the management company can only charge an appropriate amount for services it actually caries out ie in London the maximum generally considered reasonable is 15%.

do you not expose yourself to corporation tax? and then to income tax on the distribution?

Been there. Tried that. If you are a landlord trading as self employed then you cannot just start a management company as a sole trader as you are in the eyes of the HMRC Stasi one and the same person. You have to set up a limited company for the management as a separate entity. You then have to pay for all the accounting compliance and accounting etc so you have to balance that with what it saves in tax on the properties.

We have a letting agency and when run as a sole trader we couldn't charge ourselves a management fee. When run as a limited company we can.

What is the advantage of the structure suggested.
If you are the owner and you managing your own properties, all your income and expenses are calculated as if you are a sole trader running a property business. What is the advantage of creating another entity (limited company) in between. There can't be that much of tax advantage to be had after accountancy fees and paperwork involved.

The management fees charged by the limited company reduce your personal tax liability as a landlord. Remember- being a landlord is not a business in the eyes of HMRC. This structure is not a one size fits all and you have to weigh up the costs of ltd co against the tax saved. Or speak to Mark Alexander about tax planning.

Our previous accountant suggested this set up, so we did it. It actually didn't have any financial benefit for us. Anyway he is now in prison for fraud and we had a tax investigation. It was not pretty.

As long as the ltd co is a separate entity then there's not a problem. Its when you operate a "lettings agency" as a sole trader and charge yourself as a landlord when the problems start. The directors can be the same as the sole trader business but the ltd co is an entity in itself.

That is what I am trying to highlight, surely, unless you are using the limited company for more sophisticated structure like family company structure, inheritance, company to company loan, to obtain entrepreneurs relief etc... (which is only 9% savings anyway), surely 15% reduction of rental is nor here nor there. Am I missing a bigger picture here?

Depends on size of portfolio and whether or not you manage other landlords properties. If you only have a few personal properties then - no. If you have 60 or 70 - yes possibly. If you have around 10-15 and a managed portfolio that produces around 60-70k a year in management income then it can be worth it. But you need to crunch the numbers and speak with an accountant who knows what he or she is doing with rental accounts.

Reply to the comment left by Gary Nock at 30/04/2020 - 17:26
I would guess if you have 60-70 they are unlikely all in your own name..

I did this for a while, as the company was already setup renting out a property. I would avoid getting the money sent to the company or you would have to register client money protection. You would still have to register with PRS which is pretty simple...

There is overheads of running company that you don't think about like filing taxes etc that you would need at least some sort of scale to make it worth while unless you already have a company setup.