How do I handle service charges and ground rent in my accounts?

If you own or let leasehold property in the UK, you will almost certainly encounter service charges and ground rent. These costs can be confusing to record, especially if you manage multiple properties or prepare formal accounts for a business. Whether you are a landlord, tenant, or property management company, the way these expenses are treated in your books affects your tax position and financial reporting.

This article explains what service charges and ground rent are, how to record them correctly in your accounts, and how to stay compliant with HMRC and leasehold accounting rules.

What are service charges and ground rent?

Service charges and ground rent are two separate but related payments commonly found in leasehold property arrangements.

• Service charges are payments made by leaseholders or tenants to cover shared costs of maintaining and managing the building or estate. These can include cleaning, insurance, lighting, gardening, repairs, and contributions to sinking funds for major works.

• Ground rent is a fixed payment made by the leaseholder to the freeholder (landlord) for the right to occupy the land on which the property sits. It is usually specified in the lease and may be reviewed periodically.

Both costs can be billed separately or together, but they have very different accounting and tax treatments.

Accounting for service charges as a leaseholder or tenant

If you own a leasehold property or manage flats where you pay service charges, you must record these payments as property expenses. The treatment depends on whether you rent the property out or live in it yourself.

• If you rent the property out: Service charges that relate to the maintenance and management of the rental property are generally allowable expenses for tax purposes. You can deduct them when calculating your rental profit for Self Assessment or Corporation Tax.

• If you live in the property yourself: Service charges are not tax deductible, as they relate to your personal residence. However, you should still record them accurately for budgeting and future sale calculations.

When recording service charges in your accounts, include:

• The total amount paid.

• The period covered (for example, quarterly or annually).

• The nature of the costs (e.g. insurance, maintenance, cleaning).

• The date of payment.

If the service charge includes costs for major improvements, such as replacing the roof or installing new lifts, those may not be immediately deductible. They may need to be capitalised and reflected in your property’s cost base for capital gains calculations when you sell.

Accounting for service charges as a landlord or freeholder

If you collect service charges from leaseholders, you must treat these funds as money held on behalf of others rather than as income for your business. They should not be included in your profit and loss statement unless part of the payment represents a management fee that you retain.

In accounting terms, service charge money is usually treated as a trust fund, separate from your main accounts. This ensures transparency and protects leaseholders’ contributions. Many landlords and management companies maintain a dedicated client bank account for service charge funds.

If you provide management services, you can charge a management fee, which is taxable business income. However, the rest of the service charge funds must be used only for property expenses and cannot be treated as profit.

At the end of each financial year, you should produce a service charge statement of account, showing:

• Income from leaseholders.

• Expenditure on services and repairs.

• Any balance carried forward or deficit.

This is often required under lease terms and by property law, particularly for larger developments managed under the Landlord and Tenant Act 1985.

Accounting for ground rent as a leaseholder

Ground rent payments are separate from service charges and have their own accounting treatment. If you pay ground rent as a leaseholder and the property is let to tenants, you can usually claim it as an allowable expense.

Ground rent counts as a property cost directly related to earning rental income. Include it under “property expenses” in your accounts or tax return. Make sure to record:

• The payment date.

• The period it covers.

• The recipient (usually the freeholder or managing agent).

If you pay a large lump sum of ground rent in advance (for example, a lease extension premium), this may be treated as a capital expense and should be added to the property’s cost base rather than deducted as an annual expense.

Accounting for ground rent as a freeholder

If you own the freehold and collect ground rent from leaseholders, this income must be included in your accounts and tax return. Ground rent is considered property income, subject to Income Tax or Corporation Tax depending on your business structure.

However, if you only act as a managing agent and pass the rent on to another freeholder, you should treat the funds as monies held on behalf of a client, not as your own income. The key distinction is whether you have beneficial ownership of the rent or simply collect it on someone else’s behalf.

VAT treatment of service charges and ground rent

In most cases, service charges and ground rent are exempt from VAT when they relate to residential properties. However, there are exceptions.

If the building includes commercial units or if the landlord has opted to tax, VAT may apply to the commercial portion of the service charge. Similarly, if management fees are charged by a VAT-registered company, VAT must be applied to that fee.

For residential service charges, it is essential to separate any VATable management fees from exempt costs so that VAT returns remain accurate.

How to record service charges and ground rent in accounting software

Using cloud accounting software such as Xero, QuickBooks, or Sage can make managing property costs much easier.

For leaseholders:

• Create an expense category for “Service Charges” and another for “Ground Rent.”

• Enter each payment with its corresponding date and period.

• Attach copies of invoices or statements for audit purposes.

For landlords or freeholders:

• Maintain a separate bank account or ledger for service charge funds.

• Record collections and payments as trust transactions, not as company income or expenses.

• Record any management fees earned separately as income subject to tax.

For property management companies:

• Keep detailed client ledgers for each building or estate.

• Produce periodic service charge statements for transparency.

• Ensure funds are fully reconciled to client accounts.

Reporting to HMRC

For most landlords and leaseholders, service charges and ground rent appear in your annual Self Assessment or company accounts as part of property income and expenses. You do not need to submit a separate report unless you act as a managing agent or landlord holding funds on trust.

However, if you manage a block of flats, you may be required to comply with the Landlord and Tenant Act’s accounting requirements, including issuing service charge statements and maintaining trust accounts.

Common mistakes to avoid

1. Mixing service charge funds with personal or business income. This can cause accounting errors and potential legal issues.

2. Claiming non-allowable costs as expenses. Only expenses related to maintaining rental property qualify for tax deductions.

3. Failing to separate capital and revenue expenses. Improvements that add long-term value may not be immediately deductible.

4. Overlooking VAT on management fees. If you charge VAT, make sure it is properly applied and recorded.

5. Ignoring reconciliation and transparency requirements. Leaseholders have the right to request detailed statements of how their money is spent.

Professional support and compliance

An accountant experienced in property and leasehold accounting can help ensure your records meet both HMRC and landlord-tenant legal standards. They can also advise on:

• How to handle mixed-use developments.

• Correctly allocating costs between residential and commercial units.

• Preparing statutory accounts for service charge funds.

• Claiming allowable expenses for tax efficiency.

Property accounting can quickly become complicated, especially for developers or landlords managing multiple buildings. Professional support keeps your books accurate and protects you from tax errors or non-compliance penalties.

The bottom line

Service charges and ground rent are a fundamental part of leasehold property ownership, but their accounting treatment depends on whether you are a leaseholder, landlord, or managing agent. Service charges are usually trust funds used to maintain common areas, while ground rent is an income or expense depending on your position.

Recording them correctly ensures your financial statements are accurate, your tax return reflects the right figures, and you remain compliant with both HMRC and property law. With clear records and proper accounting practices, you can manage these payments confidently and maintain a transparent, well-run property business.