Demystifying real estate corporate wrappers

What is a corporate wrapper?

In the context of a real estate asset a 'corporate wrapper' or a 'SPV' (special purpose vehicle), which is another term frequently used, is an entity (or entities) established specifically to acquire real estate.  There are numerous SPV structures which can be put in place, however the most common SPVs for property acquisitions are private companies limited by shares, partnerships and LLPs.  

If you are considering acquiring a real estate asset in an SPV it is crucial to consider the best structure for the SPV at a very early stage and fully understand the administrative, legal, accounting and tax treatment of the various SPV structures available.  Furthermore, restructuring how you hold real estate assets at a later date can be a costly exercise in terms of both legal costs but also tax charges, so it is always best to seek to put in place the most optimum structure at the outset.  

What are the benefits of using a corporate wrapper for the acquisition of real estate assets?

The benefits will depend upon the type of real estate asset being acquired, the purpose of the acquisition and the future intentions in respect of the real estate asset to be acquired.

For example:

1) Residential property- buy-to-let

If you are acquiring a buy-to-let residential property it may be more beneficial to acquire the property in a private company limited by shares as rather than paying income tax on the rental income the rental profits would be subject to corporation tax which is a lower rate than higher rate/additional rate tax rate. Although, if you are intending the distribute the profits by way of dividend then income tax on the dividends also needs to be considered because of a double charge (corporation tax at the company level) and income tax on the distributed profit by way of dividend. 

However, you can control your personal income tax liability by deciding when or if to take income out of the company and if you choose to retain the income there is no income tax due on the retained income in the company which would give the company more capital to re-invest for example to build and grow a portfolio of buy-to-let properties.

What with the interest restrictions which apply for residential property held directly, there has been a trend for acquiring buy to let properties through companies. 

2) Ring fencing the real estate asset from your other business interests and keeping business interests separate

If you have an already established entity with a trading or investment business you may wish to consider whether it is prudent to set up an SPV for the acquisition of the real estate asset which would ensure that the real estate asset is ringfenced from the assets and liabilities of your other business interests.  This could be of particular importance if for example you have a trading company which could possibly fail and similarly it also means that if your property venture fails but is held in a separate SPV it will not affect your trading company.

Keeping business interests separate and in different SPVs can also create more flexibility should you decide to sell off different assets as it affords you the opportunity to consider whether to sell the asset or the SPV should you wish to realise an investment.

3) Development Joint Ventures

With real estate development opportunities, one party rarely has the necessary resource and expertise to acquire and develop the asset alone.  Setting up a SPV provides a structure for multiple parties to pool resources.

For example, an investor may have the necessary capital to acquire an asset but lack the relevant expertise and industry connections to develop it.  However, once that investor has selected his business partners, setting up a SPV provides a framework for the future business relationship and allows the parties to pool resources to work together in a joint venture. 

4) Possible stamp duty land tax savings on the future sale of the SPV rather than the real estate asset

For high value real estate assets stamp duty land tax can be a significant cost for a purchaser, which can be as high as 17% of the consideration paid for the property. However, if a real estate asset is held in a private limited company and the shares are sold in that company then the purchaser is not liable to pay stamp duty land tax but instead pays stamp duty on the purchase of the shares at a rate of 0.5% of the consideration paid for the shares. Although, over the past few years, the government has introduced draconian taxation (high rates of stamp duty land tax and the annual tax on enveloped dwellings) to prevent the holding of residential real estate (used for non-business purposes) through SPVs and there has been a trend of "de-enveloping" such properties, notwithstanding that the de-enveloping itself can lead tax charges.  Where residential properties are held in a corporate wrapper, advice should always be sought.

Whilst tax efficiency is a crucial driver in how to structure a sale/acquisition of real estate assets it should not be the sole deciding factor as there are several complexities of a share sale/acquisition which would need to be further considered before ascertaining if it is the best structure for such sale/acquisition.

Who to contact for further information?

Our corporate real estate team has extensive experience in dealing with all types of 'corporate wrapper' matters including acting on the acquisition and sale of corporate wrapper transactions. The team also works closely with our tax team and our clients other advisors, such as accountants and tax advisors, to establish the most optimum structures for our clients needs.

For any further information please contact co-heads of the corporate real estate team, Charlotte Whitworth and Anthony Hunt.