I regularly advise Property Investors on the correct way to structure their portfolios and investments so as to ensure that they are protected legally but also that the structure suits there long term aims whilst also mitigating tax liabilities where possible.
The difficulty many investors face is that there isn’t a ‘one size fits all’ solution and really depends on a number of factors. I have also seen investors get these issues very wrong resulting in investors losing money or paying more tax than necessary.
There are also different considerations for if you are a developer building properties to an investor investing cash or if you are a deal sourcer or a hybrid of any of the above.
The purpose of this article is to look at some of the different structures or terminology used, where to use these structures or contracts and where to avoid them.
SPV – Special Purchase Vehicle
Regardless of your strategy, for many, the most efficient way to buy, develop or flip properties is through a limited company or a series of limited companies.
A Limited Company is registered with Companies House and it is necessary to comply with various statutory duties, such as filing annual accounts but there are a number of advantages to this structure as follows:
a) It can be more tax efficient to receive dividends from a limited company in respect of ongoing rental incomes.
b) You can hold a single property in each different SPV which means you can have more flexible ownership structures with different business partners for different developments.
c) You can create a holding company structure so that the risk sits with the ‘trading’ SPV but the profits filter up to the holding company as well as tax efficiencies.
d) It can be significantly cheaper to buy or sell a property as the sale or purchase of the shares in a company because stamp duty on the purchase of shares is charged at 0.5% which is far lower than stamp duty land tax and also saves on further HMLR fees.
e) If you build a portfolio of properties in one company, it may be easier to sell the company as a going concern in future to facilitate the sale of the portfolio rather than selling the properties individually saving on legal fees, HMLR fees and stamp duty.
f) You can create ownership dependent on the level of investment in the business and this can be adjusted more easily than amendments to HMLR.
Joint Venture
I speak to a lot of people who talk about entering into a ‘joint venture’. A Joint Venture in a legal sense is fairly distinct and many people referring to a joint venture are often talking about creating an SPV with a shareholders agreement.
Joint Ventures are more common where, for example, one party owns or buys the land or building and they partner up with a builder or developer to redevelop or build the properties with each side sharing the proceeds.
Joint Venture Agreements can be extremely complex and need careful consideration to deal with issues such as risk, costs and expenses such as planning, utilities and similar as well as allowing for the possibility of the parties being unable to sell or refinance the project.
These types of arrangements may be suitable for instance where a farmer has a disused barn or building which needs redeveloping and can be a great way to share the risk of a development.
Loan Agreements
Increasingly I see situations whereby one party, an investor, loans money, potentially out of a pension, to a developer or property investor for a specific purpose, for instance to purchase a property or redevelop a property.
It is important that these agreements are properly drawn up so that both sides are protected and understand matters such as the interest payable, when repayment is due and the ramifications of failing to repay the capital within the period. Failure to properly document this can lead to complications.
It is also necessary to agree what security, if any, is to be provided by the borrower.
Legal Charge
A legal charge is a formal charge on the property, similar to a mortgage. Where there is a first charge mortgage, it is possible to create a second charge but the consent of the first charge lender will be required.
The beneficiary of a legal charge has priority on the proceeds of any sale of the property and is the normal way by which a loan agreement is secured.
Debenture
Where funds are being loaned to a Company, it may also be advisable to also put a debenture in place on the Company. A Debenture is a form of legal charge on all, or some of, the assets of the company, which can include any tangible property.
A Debenture may be a suitable alternative, or additional, security to a legal charge.
Family Investment Companies
Many investors want to build portfolios with a view to their spouses, children and grandchildren benefitting from this.
The difficulty however is that property related tax is complex and pure property companies (where the principle purpose of the company is to hold property) will not ordinarily qualify for Business Property Relief (‘BPR’).
Consequently complex planning is often required to ensure that an investors loved ones received the maximum benefit and the investor, of their estate, pays as little tax as possible. This may involve a number of strategies including setting up trusts, holding companies or separate trading businesses such as lettings and management companies or development and constructions companies such as to maximise BPR.
The above issues are complex and often require planning. Whilst Property Lawyers will advise investors on the transactions associated with land, it is often the role of someone like myself, a Corporate/Commercial lawyer, to advise on the best way to structure such portfolios.
Final Word
The best advice ultimately is to seek professional advice as correct advice will often look at your longer term strategy and this may in fact change as your lifestyle changes.
Richard Coulthard
Partner and Head of Corporate
Ison Harrison Solicitors
Richard is Partner at Ison Harrison Solicitors, based at 14 offices in Yorkshire. Richard has a particular specialism in advising investors and developers on corporate structure and governance in property based businesses.
Richard.Coulthard@isonharrison.co.uk