Tax pitfalls when buying property SPVs

This article is kindly contributed by Caroline Fleet, Head of Property Taxes at Gabelle LLP. Caroline’s contact details are at the end of this article.

Frequently, when purchasing a UK property, the sale takes place with the property held in a corporate or an offshore unit trust ‘wrapper’. Often the sale is undertaken in such a way, due to the lower rate of stamp taxes that applies on the purchase of the company (0.5% on the value of the company) compared to the Stamp Duty Land Tax (‘SDLT’) rate for a property, for example 4% on commercial property valued at over £0.5million. However, what may on the surface be billed by the Vendor as a “clean PropCo” can often turned out to be decidedly more murky when closely examined. Undertaking tax due diligence at the time of the purchase should identify these matters and allow the Purchaser to determine, given their own tax circumstances, whether it is appropriate to purchase the property directly or via its wrapper.

Historic liabilities
The purchase of the company will mean that the acquirer will also acquire all of the historic liabilities of the companies including tax. It is therefore vital to establish whether the tax returns and payments in respect of direct tax, PAYE (if applicable), VAT and SDLT have been made on time and are up to date. The Purchaser should also be aware of any current tax investigations by the tax authorities and the adequacy of the level of any provision that is held in the company in respect of taxes.

In addition, the Purchaser should consider the quality of the warranties and the indemnities that are provided in respect of these historic tax liabilities. It is common in such purchases for tax to be covered under a separate deed with a separate de-minimis liability agreed as well as different time limits compared to the standard commercial terms.

Where the property is held as an investment, the Purchaser will also acquire the historic base cost of the property, rather than the current market value. Consideration should therefore be made in the purchase price for a discount to reflect any inherent capital gains liability.

Residency of the company
Where a commercial property has been held in an offshore company as an investment, the rental income will have been subject to income tax (20%) and any future capital gains by the company should be outside the scope of UK capital gains tax. In order to secure this position, it is vital that the ‘central management and control’ of the company has been actively exercised in the overseas jurisdiction. Concerns regarding whether central management and control has been correctly established are most likely to arise where there is a UK property agent or affiliate, where there is the use of professional trustee directors on the board or where key decisions have been determined through a written resolutions rather than at board meetings. In examining the residency of the company, it is also essential to consider the quality of the contemporaneous supporting documentation as often this can be thin on the ground. Too frequently the board minutes may only describe the legal final position taken and does detail any of the discussion and ‘decision-making’ process itself. A Purchaser may well wish to dig deeper into the other sources of evidence to gain sufficient assurance on the residency of the company.

Status of the Property
Whether the property is treated as an investment or stock is fundamental in determining the extent and level of tax applied. A Purchaser needs to be satisfied that the historic position adopted is supported by the evidence available and reflects the original intention of the company in respect of that property. If the evidence, including business plans, accounts and board minutes do not support the position taken, this could well lead to an acceleration of tax due or additional tax arising.

Degrouping charges
It is vital to ascertain exactly how the property was placed within its SPV, particularly if any earlier tax planning has been undertaken, as this may well alter what the Purchaser can subsequently do with the property, for example repaying loans or transferring the asset.

Where the property has been transferred within the same corporate group, an SDLT group relief claim may have been made. Such a claim is subject to a degrouping charge, if the SPV leaves the group within three years of the transfer whilst still holding the property. In addition, if the property is in a UK company the company would also suffer a capital gains degrouping charge if the property has been transferred within a capital gains group within the last six years.

Losses and other assets
The company may well have some tax assets within it, which could be of value to the Purchaser, for example, either Property income losses or trading losses. However, such losses will be subject to anti-avoidance rules, so careful consideration as to exactly what the Purchaser is going to do with the company/property afterwards needs to be made, before any cash value is paid for such assets.

Where the property is commercial, there are also likely to be capital allowances attached to the property, that the Purchaser would be able to use going forward. Following the recent changes to the capital allowances, it will be important to ensure that the capital allowances have been ‘pooled’ by the company within the required time in order to secure the value from such assets.

Future plans
As well as envisaging the past history, it is vital that the due diligence is undertaken with an eye on what the future plans are for the property by the Purchaser, as this can have a bearing on how the purchase is undertaken. By way of example, if the Purchaser wishes to transfer the property offshore following a purchase of the property in a UK company, consideration needs to be made as to what indebtedness there is in the company, the inherent capital gains therein, any options to tax and previous planning undertaken. If unravelling the property is likely to cumbersome and/or trigger SDLT for example, it may be well be more advantageous to purchase the property directly.

As with any purchase, there is no substitute to undertaking full due diligence so that the Purchaser is fully aware of exactly what they are buying and how it fits in with their own plans in respect of the asset.

Caroline Fleet, the author, is Head of Property Taxes at Gabelle LLP. She can be contacted on +44 (0) 20 7182 4760 or at caroline.fleet@gabelletax.com.

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