From April 2024 there has been an important change in legislation for trusts and estates where income from all sources (i.e. interest, dividends and rent) exceeds £500. With the interest rates at levels not seen for many years, it is increasingly likely that interest will arise on service charge and other funds held that will necessitate the filing of tax returns and tax becoming due.

Below are further details of these changes regarding interest income received on the residential service charges that may apply to your clients and the properties under management.

Section 42 of the Landlord and Tenant Act

Section 42 of the Landlord and Tenant Act 1987 (“s42”) stipulates that contributions to such funds are deemed be paid into a trust fund held by the service charge recipient under the lease. The leases may often refer to such funds being held on trust for the benefit of the occupiers.

For s42 to apply:

• the landlord must not be an ‘exempt landlord’, and
• tenants of two or more dwellings,
• under the terms of the lease,
• must be required to contribute directly or indirectly for repairs, maintenance, etc., and
• those charges, or part of them, must be variable.

Where there exists a deemed trust under the above provisions, and investment income (interest) is being earned by the trust, a tax liability would ordinarily arise, and a trust tax return should be submitted.

For the tax years 2016/17 to 2023/24, there was an informal arrangement whereby HMRC did not require notification (from trustees) where the only source of income was savings interest, and the income was below £500. In simple terms, this meant that a return did not need to be submitted, nor tax paid, where the tax due was below £100.

From 6 April 2024, the informal arrangement has been formalised in legislation. Now, trusts with income of all types (not just interest) up to £500 do not need to report to HMRC or pay tax on that amount as it arises. Where income exceeds that amount, it should be reported, and tax will be payable on the full amount.

Where tax is due in respect of income from service charges which are paid in respect of dwellings in the United Kingdom and are held on trust under s42, it is not subject to the special trust rate of 45%, but rather the basic rate of 20% for the 2023/2024 and 2024/2025 tax years.

The trustee, being the landlord or other person to whom the service charges are payable by the tenants under the terms of their leases, will be required to submit a trust tax return to report tax due.

Where a trust has a liability to tax, it will be required to register with HMRC’s Trust Registration Service (trusts under s42 are excluded from the requirement to register where no tax return is required).

In situations where you think funds are held outside the Landlord and Tenant Act 1987, whether they are still held in trust will depend on the particular details. It can be that a trust exists which is taxed at the basic rate or falls to be taxed at the special trust rate, or even that the income comes under corporation tax in the hands of the landlord or management company. There are several permutations, and we can advise on these. This would also cover commercial property service charges and related funds.

It is important that you are aware of the above and how this might apply to the funds held. Trust tax returns are prepared based on the fiscal year to 5 April and due for filing by 31 January of the following year, with tax then also due. There are penalties for late submission and payment.

We can assist, in assessment, registration, preparation and filing of the returns. Contact Barnes Roffe today for more information.

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