Setting up a Private Syndicate to Invest in UK Property: Choosing the right legal structure
This article is for you if you are thinking about setting up a property investment club or SPV (special purpose vehicle), so that a number of people can invest in commercial or residential property together.
13 March 2014
This article is not about setting up a fund – for example, if you want to manage investments for people who will just put in money and otherwise not participate in decisions. That kind of arrangement is much more highly regulated, and usually involves a different legal structure.
This article is also not about get-rich-quick investment clubs which are commercially marketed, often using seminars and high pressure sales techniques, and promising discounted properties off-plan. They are something to avoid altogether.
For the purposes of this article, it is assumed that all the participants in the investment club are UK resident adults, and that they want the legal structure to be as simple as possible.
An investment club can fall foul of a number of legal and regulatory rules if it is not set up and operated properly. The last thing that you want is to be on the wrong side of the law, so it is worthwhile taking the trouble to do it right.
‘Collective investment schemes’ and ‘alternative investment funds’
One key objective is to avoid the arrangements being treated as a “collective investment scheme” (“CIS”) for the purposes of UK financial services law. This is because the establishment, operation and winding up of a CIS is a regulated activity which must be performed by a person authorised by the Financial Conduct Authority. (There is no minimum threshold for this in terms of the amount of money to be invested.) In addition, there are special restrictions on how a CIS can be promoted.
You also want to avoid falling within the definition of “Alternative Investment Fund” (“AIF”) for the purposes of the European Alternative Investment Fund Managers Directive. Although there is a lighter-touch regime which applies to managers of smaller AIFs, it still requires those managers to be registered with the FCA.
One of the main ways to stay outside the scope of CIS and AIF regulations is to make sure that all the participants in the syndicate participate in day-to-day management of the arrangements. This is critical. This means that all the investors must agree to actively participate (and vote) in key decisions during the life of the syndicate. This in turn sets a natural limit on the number of participants – if you have more than 10 or 12, the logistics of decision-making can become very awkward.
As a rule of thumb, you should apply this “everyone-participates-in-the-decisions” rule, whatever legal structure you choose.
Legal structure options
As regards the legal structure, there are usually three main options for your investment club:
UK private limited company – where all the participants become shareholders and directors in the company. The main documentation would consist of the company’s articles of association, together with a shareholders’ agreement. Capital can be contributed as share capital, and possibly also as loans to the company.
UK LLP – where all the participants would become members of the LLP, and would contribute capital to the LLP. An LLP does not have articles of association, and the arrangements would be documented in a private LLP agreement between the members and the LLP.
A trust – where the participants are beneficiaries under a trust and have a share in the trust assets proportionate to their capital contribution. A nominee company would be established to hold the legal title to the trust’s assets (i.e. the property). The core legal document here is the trust deed, which sets out the procedures for decision-making and how any income or capital returns are dealt with.
Actually, there’s another main option, which is joint ownership, so that all the club members hold the property jointly (as tenants in common). That option has been discounted for the purposes of this article because it does not give the members the benefit of limited liability.
The limited liability offered by companies and LLPs comes at a cost, namely the need to prepare and file accounts and deal with a certain level of company secretarial-type administration. This is all manageable, but the costs need to be factored in.
Investment vs Trading
The choice between those two main structures is often down to tax considerations, which is in turn influenced by the investment strategy. In particular, it is important to consider whether the property activities are likely to be regarded as investment or trading for tax purposes. Where the intention is to develop a property so that it can then be resold in a short time frame at a profit, this is generally considered to be trading. This would generally be the case for a typical residential property development where the intention is to buy the property, develop it and then sell around two years later, and not hold the property to produce rental income. Where the intention is to develop the property, hold it to generate income from rental activities and achieve capital growth over a period of time, the tax treatment is more likely to be that of an investment.
Illustrative effective tax rates for individuals holding a property business through a company or partnership
Source: Menzies LLP. The above table is a very basic illustration which makes a number of assumptions. The figures in relation to the company include the combination of corporation tax and tax paid by the individual on extraction. The workings assume that no specific tax reliefs are available (except for the below), that the company pays corporation tax at 23%. The table ignores the fact that in practice the companies may choose to retain and reinvest profits. It is also assumed that the investors are UK tax resident higher rate tax payers.
* This assumes that entrepreneurs relief is available to the individuals on a disposal of a qualifying interest in a trading company, otherwise the relevant percentage would be 44.5%.
Need some help?
If you would like to know more about how to set up a self-managed property syndicate, this is a great place to start: