Practical questions when considering a property SPV purchase

It is not unusual for property assets to be held in a Special Purpose Vehicle or SPV – particularly in the case of commercial property or portfolios of residential property. From a purchaser’s perspective, this raises the question of whether to purchase the shares in the SPV, or whether to buy the asset directly (and leave it to the seller to extract the sale proceeds from the SPV).

A share purchase can have many advantages – in particular potential tax savings, notably UK Stamp Duty Land Tax. It’s important, however, to be aware of the differences between the two options, so that you can make an informed decision and reduce the chances of serious (and expensive) problems further down the line.

Here, briefly, are the key questions when considering an SPV purchase as the means of acquiring UK property.

 

Risk

Property SPV transactions have a distinct risk profile, which is very different from that of a direct property purchase. There are two main reasons for this.

Firstly, on a direct property purchase, the purchaser can rely directly on property searches and the process of land registration in order to obtain good title to the property, free of encumbrances. This is not the case on a Property SPV purchase, where searches give only indirect protection.

Secondly, the purchaser of the shares of a Property SPV will inherit (albeit indirectly) any actual or contingent liabilities and issues relating to the corporate entity itself. In order to assess those liabilities, the purchaser must rely on information provided by the seller. This includes information made available in the due diligence process, backed up by warranties and indemnities. Those warranties and indemnities will be of no value if the seller (or its guarantor) does not have the financial standing to meet possible claims.

 

 

Tax

Prospective purchasers will need to engage tax advisers to carry out tax due diligence investigations in relation to the target Property SPV, and the tax advice will differ according to the specifics of each transaction. In this blog we don’t have space to cover this issue in detail, but here is a brief overview of some of the possible considerations:

• Whether the Property SPV holds the property as an investment or as trading stock
• Commercial property may also be subject to VAT and the capital goods scheme, which can lead to a withdrawal of VAT previously reclaimed by the Property SPV if the use of the property has changed, or might change post-completion
• Where residential property is held, whether it falls into the Annual Tax on Enveloped Dwellings (ATED) regime. And, if ATED applies and relief is not available, the effect of the ATED rules on any inherent gain as well as the cost of future annual tax charges
• Has relief or exemption for UK tax purposes (including SDLT) been claimed by the SPV which could be withdrawn on a sale of the Property SPV or on a post-completion change in use of the property itself?
• Potential liabilities arising from any historic failure to comply with tax obligations.
• Any ongoing or pending investigations by tax authorities
• Whether the purchaser is likely to be able to utilise any tax losses in the Property SPV, and therefore whether any value should be attributed to those losses
• If the Property SPV is tax resident offshore, whether the SPV’s central management and control has been maintained offshore, and whether this has been properly documented
• UK Stamp duty – the rate on the sale of shares in a company is still just 0.5% whereas stamp duty land tax on the sale of property is at rates of up to 15%
• Inheritance tax – previously, UK residential property owned via an offshore company was usually outside the taxable estate of a non-UK domiciled individual, but this is no longer the case
• Capital gains tax and income/corporation taxes – holding UK residential property via an offshore company brings the company within the scope of the annual charge and capital gains tax, except where an exemption applies.

It’s essential to get advice on the tax risks and your options to mitigate them. Winslows Tax Law have created this detailed guide, which will give you a good basic grounding in the key issues.

 

Complexity

Property SPV transactions are more complex than direct property purchases, and therefore usually entail higher transactional costs. It is not uncommon for a proposed purchase of a Property SPV to be abandoned because of risks or issues which become apparent during due diligence and negotiation. If there are any significant issues, it is generally better for the purchaser to identify them as quickly as possible. Some of the main questions that should be addressed early on in the process include:

• Who or what exactly is the seller or sellers? (Meaning the person or legal entity which actually holds the shares in the Property SPV.) Often this is not clear at the outset of negotiations for a prospective purchase. The presence of multiple sellers may mean more complexity in negotiations
• What is the seller’s financial standing, and is the purchaser likely to be able to enforce any claims effectively? This can rule out Property SPV purchases where the seller is a trust (and unable to give warranties) or is in jurisdictions where legal recourse is considered unreliable
• When and where was the Property SPV incorporated, and what activities has it undertaken? Generally speaking, the older it is, the more likely it is to have some issues. Buying a non-UK company will usually involve additional acquisition costs, because of the overseas advice and legal opinions required
• Was any tax planning undertaken when the property was originally brought into the Property SPV? Any such planning should be a red flag for prospective Property SPV purchasers, because HMRC have successfully challenged a number of SDLT planning arrangements, resulting in additional SDLT being collected from certain property groups
• Is there debt secured on the property? If so, the lender will need to be involved in the completion mechanics so that the security can be released
• What are the purchaser’s plans for the property and the Property SPV? If the Property SPV needs to be unwound and the property extracted, then the costs involved can outweigh any savings in transactional taxes.

 

Find out more

This short blog post has only been able to give a brief overview of the key considerations. For more practical guidance on private syndicates, and on all aspects of property investment and development, check out the Resources section of our website.

 

Important notice

Nothing in this blog post is legal advice, and it does not cover related topics such as how to promote the project and attract new investors while complying with FCA regulations.