Property Wrappers - SPVs
By Katie Mear, Solicitor, at Sykes Anderson Perry Limited, Solicitors and Chartered Tax Advisers in London, England
This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted.
What is an SPV?
- An SPV is a single or special purpose vehicle (SPV). This is an entity created for a specific purpose usually a company, in this article we will consider property holding SPVs.
- It is common place to find properties (particularly in London) held in an SPV wrapper and for properties to be sold and acquired under that SPV wrapper. This article briefly explores the differences encountered when acquiring a property in an SPV wrapper and the implications arising from such an acquisition.
What are the differences between buying a property and buying a property in an SPV wrapper?
- An SPV transaction will involve the purchase of the shares in the SPV rather than the property. By acquiring the shares in an SPV the buyer will acquire not only all assets belonging to the SPV, but also all its liabilities. The acquisition will involve two key aspects (1) property due diligence; and (2) company due diligence. These two elements will be run in parallel with each other.
- The property due diligence will be very similar to that undertaken on a straightforward property acquisition. Preliminary enquiries will be raised with the seller’s solicitor, property searches obtained and title documents reviewed. There are also additional property considerations which arise because on the acquisition of an SPV the owner of the property does not change, but remains the same, instead it is the ownership structure of the SPV which changes. Accordingly, it is important that you enquire as to the position with property outgoings – utilities, council tax etc. Any arrears will remain with the company and therefore responsibility will ultimately pass to the buyer. It will be necessary for such expenses to be apportioned on completion between the seller and the buyer.
- The company due diligence will involve a comprehensive review of the company, including the company’s constitution, statutory books (if any) and accounts. It is essential that full due diligence is undertaken to ensure the SPV, which is to be acquired, is of good standing and free from onerous obligations. Enquiries must be conducted to check that the seller has full legal and beneficial title to the shares which they are purporting to sell and that they are free from all encumbrances. If it is an offshore company a lawyer from that jurisdiction will need to be appointed to assist with the due diligence.
- The main transactional document will not be a property sale contract, but rather a share purchase agreement (SPA). Commonly, an SPA is much more comprehensive than a property contract. As mentioned, the acquisition of an SPV will crucially not only involve taking on all of its assets but also all of its liabilities. It is common for a buyer to seek various warranties (contractual statements) from the seller about the assets and liabilities of the SPV. These seek to protect a buyer if any liabilities arise in the future and must be carefully drafted.
- In term of timing, it is common on the acquisition of a property for there to be a gap in between exchange of contracts, at which point both the buyer and seller are legally bound to the transaction subject to the terms of the contract, and completion. On an SPV purchase it is more common for there to be a simultaneous exchange and completion.
What are the advantages?
Owning a property using an SPV is favoured by investors for a multitude of reasons. The main reasons often include: -
Owning a company though an SPV creates a layer of confidentiality and separation between the property and the individual behind the company, often referred to as the ultimate beneficial owner. The level of confidentially will depend upon the jurisdiction of the company and the rules of the particular country.
No UK tax charge
One of the key reasons why transactions are structured in this manner is that a share sale does not attract stamp duty land tax in the UK. When you buy a property you will face this charge and this can be high (the rate of 7% applies to purchases above £2million, or 15% if the property buyer is a company). This can represent a significant saving for a buyer.
There is also now an advantage for the seller – if the company disposes of the property it may have a capital gains tax liability in the UK. But if the ultimate beneficial owner is not resident in the UK he can sell the SPV shares without this capital gains tax charge.
Tax Planning and Structuring
The SPV can be structured in many different ways, for example it may be possible to hold the shares in the owning company via a trust or nominee structure, which could be beneficial for future planning. The structure can be beneficial from an inheritance tax perspective depending on the domicile of the ultimate beneficial owner.
The use of an SPV allows investors to ring fence property assets, which may have tax and accounting benefits.
If the underlying property is a leasehold flat it may be beneficial to acquire an SPV which already has a period of ownership which may give it additional rights in relation to statutory lease extension.
Future re-sale of the property
You will have the option to sell either the property or the company in the future. This gives you the flexibility to consider and select the most beneficial option at that time. It may also impact on the price obtainable for the property.
Future Management Considerations
- It is important to consider not only the implications arising on the acquisition but also the future management. In addition to dealing with the management of the property it is also necessary to ensure the company is properly managed. The level of management involved will depend upon the jurisdiction of the company. It may for example be necessary to file annual returns and accounts. In most cases a company administrator based in the jurisdiction is appointed to deal with such matters. The person appointed needs to be trustworthy.
- In terms of property management, this should operate in the same way as if the property had been acquired outside of an SPV wrapper.
How have recent changes to UK taxes impacted on SPVs
- Historically the SPV structure has been favoured for tax purposes but there are additional considerations now including an annual tax and a capital gains tax charge on disposal. The downside is that you take on the gain in value which has already accrued up to the date of purchase. These issues will need to be factored into the amount which the buyer is prepared to pay. It is also necessary to weigh up the potential inheritance tax benefit and the stamp duty savings against these charges. Specific tax advice must be sought in all cases.
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