real estate holding structures - eversheds-sutherland.com€¦ · create #1: real estate holding...

CREATE #1: Real Estate Holding Structures

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CREATE Workshop #1Real Estate Holding Structures

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• Holding structures: what are we talking about?

• Overview of structures:• typical structures

• commercial benefits and issues

• who likes what

• Jargon busting

• Budget update

• Changes and trends

Setting the scene for today

Eversheds LLP | 23/03/2016 | CREATE Workshop #1


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Direct and indirect holding

DIRECT

Investor holds property in own name

INDIRECT

Investor holds an interest in a vehicle, which holds the property

Investor Investor

VEHICLE

UK Property UK Property


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Acronyms!

Do you know your ELPs from your LLPs?

See handout.



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Let’s simplify this!

Interest restriction from 2017

Attack on tax avoidance

The court of public opinion

IncreasedRegulation

New structures, new regimes

FATCA

Solvency IIAccessing retail

PPG and ATP cases

REITs

New forms of finance

EUUTS, PAIFS, ACS

Qualifying private

placement

Pensions changes

State Aid

CGT and non-residents in Resi

BEPS

ATED and SDLT

Diverted profits tax

Seeding reliefs

Disguised investment

management fees

ISAs

Infrastructure

Transparency

Eurobonds Jurisdictions

Common Reporting Standards

Student

SDLT

Joint ventures

Dividend tax changes

Extra 3% SDLT

PRS, BtL, BtS, BtR

Tax rates and use of losses

AIFMD

Care homes

Indirect Real Estate


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Why do it?

Limited liability

Facilitates finance

Privacy

Indirect real estate investment

Globalisation

Facilitate joint ownership

Liquidity

Flexibility on exit

Optimising returns

Tax



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Factors that influence structure

PARTIES

Holding structures

ASSETS

BUSINESS PLAN

OPERATIONAL REGULATION

RETURN

SOUGHT

EXIT


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Holding structures

Typical indirect holding structures



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Investor

Onshore company

UK Company

Bank

Property Management

Interest

Fees

Income

Taxable

Gains

Equity Loans

Dividends Interest

Benefits • Easy to manage in UK• Limited liability • Flexible• Corporation tax 20% (17% in

2020)• Stamp duty vs SDLT

Issues • Corporation tax• Profit extraction • Disclosure of significant interest

Who • UK investors• Traders• Investor preference

UK Property


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Investor

Offshore company

Offshore Company

Bank

Property Management

Interest

Fees

Income

Taxable

Gains

Equity Loans

Dividends Interest

Benefits • No tax on gains• No stamp duties on shares• Privacy – but see consultation• Flexible• Income tax @20% effectively

reduced through interest and other deductibles

Issues • Offshore management• Choice of jurisdiction• Reputation• Risk• Offshore trading/ development• Anti-avoidance

Who• Non-UK investors• Business plan with roll-up of

gains

UK Property



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Investor

Propco/Opco

Offshore CompanyBank

Interest

Gains

Taxable

Income

Equity Loans

Dividends Interest

Benefits

• Split operating and investment business

• Gains offshore, trading onshore• Facilitates sale of holding

company or entities separately

Issues

• Identification of trading

business

• Offshore management

• Admin costs

Who

• Investors with trading business

UK Opco

Trade

Offshore Propco

Lease

Rent


UK Property

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Parent company

JPUT – income transparent: gains opaque

Offshore trustees

Gains

99% 1%

Benefits

• No stamp duty/ SDLT

• Income transparent

• Opaque for gains

• Flexible

• Assists liquidity

Issues

• Need a second investing entity

• Third party professional trustees

• Offshore management required

• Regulatory control/authorisation

Who

• UK tax exempt entities

• Want liquidity

InvestorSecond

unit-holder

Property management

Income

UK Property


JPUT

Income


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Limited Partnership

General partner

Income Gains

Benefits • Flexible and well known• Limited liability for limited partners• Tax transparent for income and

gains• UK management through GP

Issues • Need for a GP, cumbersome• SDLT on sale/changes in

holdings/seeding• Limited partners cannot participate

in management• Liquidity

Who • Onshore investors with UK assets –

long term hold• Institutions• Private equity real estate

Investor 2

LP

UK Property

Investor 1


Share of income and gains

Share of income and gains

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Comparisons: general guide: (commercial)UK Company Offshore company

(Jersey, in other jurisdictions it may be different)

JPUT (Transparent version)

English Limited Partnership

Type of entity Separate legal entity Separate legal entity Not a separate legal entity –unitholders are beneficial owners and trustee is the legal owner

Not a separate legal entity

Type of liability Limited liability for shareholders

Limited liability for shareholders

Limited liability for unitholders

Unlimited liability for general partner (GP) and limited liability for limitedpartner (LP) provided it is not involved in day-to-day

management

Management Onshore Offshore Offshore Onshore by GP

Tax status Tax opaque Tax opaque Generally transparent for UK income tax purposes and opaque for gains, provided it is a “unit trust scheme”

Tax transparent for income and gains

Tax on income/profits in vehicle

Corporation tax at 20%(reducing to 17% in 2020)

Income tax at 20% Transparent for income Partners taxed on incomeaccording to own tax status

Tax on gains in vehicle

Corporation tax at 20%(reducing to 17% in 2020)

None, if managed offshore and no UK trading

As for offshore company Partners taxed on gains according to own tax status

Stamp duty on transfer of interest

Stamp duty payable by purchaser of shares at 0.5% of price

No No SDLT on transfer/change in partnership shares

Interest deduction At company level subject to worldwide debt cap (see proposed restrictions on tax deductibility of interest)

Yes provided wholly & exclusively for property rental business (see proposed restrictions on tax deductibility of interest)

Potentially at unitholderlevel

Rules depend on whether partners are subject to income tax or corporation tax



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Joint Ventures

An introduction


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Joint Ventures: general

WHY?

• Pool resources and expertise

• Access to assets

• Diversification

WHAT?

• JV company – onshore / offshore

• JPUTs

• Partnerships

FACTORS INFLUENCING STRUCTURE

• Parties

• Assets

• Return

• Operational

• Regulation

• Exit

ADDITIONAL CONSIDERATIONS

• Alignment

• Decision making

• Deadlock



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Why not a trust for land?

• Co-ownership

• Risk:• inadvertent partnership: joint and several liability

• inadvertent collective investment scheme: tax and regulatory


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CIS

• Commercial arrangement between economically independent entities

• Joint venture participants share in the control and decision making of the business

• No specific legal or regulatory regime

• Pooling of investment

• Independent third party management with investors receiving the profits

• Regulated

• Exemptions

Joint venture or collective investment scheme?



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Putting it all together

Mixed use site


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Putting it all together: mixed use site


Road

Resi to hold

Commercial

hold

Commercial

Commercial

Resi to hold


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Putting it all together: mixed use site

ELP

General partner

Investor Investor

UK Propco

Offshore Co

UK Trading Co

Commercial Commercial Resi for saleResi to hold


JPUT JPUT

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Changes and trends



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Budget update


• SDLT:• new regime for commercial property: 5% top rate

• 3% for additional residential properties

• Attack on offshore developing/trading

• Corporation tax reduced to 17% by 2020

• Cap on interest deductions from 2017

• Change to use of losses from 2017

• Carried interest rules changing again

• Other anti-avoidance to watch out for

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Changes and trends

The march against tax avoidance

New investment

opportunities / targets

BREXIT Regulation


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