Property Income Wheeze

BIG WAL

Happy New Year to all. Can anyone help with property related query ?

A client owns both A Co and B Co. They have very different trades and both trades run at a loss.
But B Co has letting income from residential property, which can’t be offset against the trading loss
and therefore has a CT liability.

So he’s decided that A Co will charge a management fee to B Co for administering the properties.
(Assume it can be backed up with proper paperwork). On that basis, A Co still won’t pay CT because
even after the management fee income, there's still a small loss.

For B Co, the management fee can quite legitimately be offset against the property income– mitigating
tax on the property income.

Sounds like a good wheeze (just like Starbucks) –or is there a catch ?

reader

BIG WAL wrote: »

Happy New Year to all. Can anyone help with property related query ?

A client owns both A Co and B Co. They have very different trades and both trades run at a loss.
But B Co has letting income from residential property, which can’t be offset against the trading loss
and therefore has a CT liability.

So he’s decided that A Co will charge a management fee to B Co for administering the properties.
(Assume it can be backed up with proper paperwork). On that basis, A Co still won’t pay CT because
even after the management fee income, there's still a small loss.

For B Co, the management fee can quite legitimately be offset against the property income– mitigating
tax on the property income.

Sounds like a good wheeze (just like Starbucks) –or is there a catch ?

I would have thought that this transaction would have to be disclosed in both sets of accounts as a related party transaction and that HMRC could challenge the valuation of the transaction, i.e. argue that the valuation of the management fee is too high.

BIG WAL

Thanks - I hadn't thought of that. I'll make sure it's disclosed in both accounts, and client is advised that while it worksfor tax, there's a risk of it being challenged.