Demystifying Real Estate Corporate Wrappers

What is a corporate wrapper? 

In the context of a real estate asset a "corporate wrapper" or an "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  and LLPs. 

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

The term "corporate wrapper" is also frequently used in the context of the sale of a property whereby the shares or membership interest (in the context of an LLP) of the property holding vehicle are sold rather than the property itself, frequently referred to as a "corporate wrapper sale".

What are the benefits of using an SPVfor 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. Buy-to-let residential property 

   Acquiring a buy-to-let residential property through a private company limited by shares may offer tax advantages, as the rental profits would be subject to corporation tax, which is charged at a lower rate than higher rate/additional rate income tax. Companies also benefit from more favourable rules on mortgage interest deductions. However, if you are intending to distribute any profits by way of dividend, the potential for double taxation also needs to be considered i.e. corporation tax at the company level and income tax on the profit which is distributed by way of dividend. The position will vary, depending on the shareholders' tax residence status, as non-resident shareholders may not have any additional liability to tax on dividends received by them.

   In any event, you can control your personal income tax liability by deciding when, or if, to take income out of the company. If you choose to retain the income there is no income tax due on the retained income in the company (after any corporation tax), which would give the company more capital to re-invest (i.e. to build and grow a portfolio of buy-to-let properties).

   With the restrictions on interest deductions now applying for residential property held directly by individuals, there has been a trend over recent years to acquire 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 existing entity with a trading or investment business, it may be prudent to set up an SPV for the acquisition of the real estate asset. This would ringfence the real estate asset 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 has other liabilities unrelated to the real estate assets. Similarly, it also means that if your property venture encounters financial difficulties, it may be possible to ensure that this does not affect your trading company, so long as it is carried on through a separate SPV.

   Keeping business interests separate and in different SPVs can also create more flexibility should you decide to sell off (or gift) different assets, as it affords you the opportunity to consider whether to transfer the asset or the SPV.

3. Development joint ventures

With real estate development opportunities, one party may not have the necessary resources and expertise to acquire and develop the asset alone. Setting up an SPV provides a structure for multiple parties to pool resources.

For example, an investor may have the necessary capital to acquire an asset but lacks the relevant expertise and industry connections to develop it. However, once that investor has selected his business partners, setting up an 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 ("SDLT") can be a significant cost for a purchaser, which can be as high as 19% of the consideration paid for the property. However, if a real estate asset is held in a UK private limited company and the shares in that company are sold then the purchaser is not liable to pay SDLT but instead pays stamp duty on the purchase of the shares at a rate of 0.5% of the consideration paid for the shares. Where a property is held through a non-UK SPV, no SDLT or stamp duty would usually be payable on the purchase of the shares. 

SDLT does not apply to properties in Scotland or Wales, where different rules apply. 

Over the past decade, the UK Government has increased taxation applying to real estate assets (through increases to the rates of SDLT and the introduction of the annual tax on enveloped dwellings ("ATED")) in order to discourage the holding of residential real estate which is used for non-business purposes, through SPVs. In some cases, such properties have been "de-enveloped" by being distributed to the shareholders, in particular, to save on ATED and the cost of maintaining the corporate structure. It is important however to be aware that de-enveloping itself can lead to tax charges, particularly if a property has increased in value. As a separate issue, the potential SDLT saving on acquisition of an enveloped property may outweigh the cost of ATED going forwards.  Where residential properties are held in a corporate wrapper, advice should therefore always be sought.

Whilst tax efficiency is a crucial driver when structuring the sale or acquisition of real estate assets, it should not be the sole deciding factor. There are complexities associated with a share sale/acquisition which would need to be considered in each case.

Our Corporate Real Estate and Tax teams have extensive experience in dealing with all types of 'corporate wrapper' transactions from initial structuring advice, to establish and set up the optimum structure for your needs to acting on the acquisition of and sale of corporate wrapper structures.

Find out more about our work in Corporate Real Estate