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Country - England & Wales
Corporate Vehicles
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INTRODUCTORY NOTE
Holding or ownership structures available for investment in real estate will normally deploy tax transparent vehicles. These structures will also allow investors to limit their liability, whether or not they are tax resident in the UK and whether or not they pay UK income tax and capital gains tax ("CGT"). Pension funds, for example, are exempt from these taxes when investing in UK real estate due to their special status. For this reason, we have not covered the key characteristics of UK-resident companies as vehicles for collective property ownership in any detail since with the exception of the UK Real Estate Investment Trust, they would rarely be used for this type of investment as they are not tax transparent. Increasingly investment vehicles in non-UK jurisdictions (based on traditional UK models of investment companies and property investment partnerships) can offer more flexible and tax friendly vehicles. While the UK remains the centre of property management, it is mostly not the domicile of choice for an international fund vehicle, although this may change with the growth of the UK REIT.
A. INVESTMENT WITHOUT A PERMANENT ESTABLISHMENT - UK LIMITED PARTNERSHIP
Minimum capital
The limited partnership's liability to external parties is by reference to pure capital commitment which, therefore, tends to be of a nominal amount. Instead, partnerships are typically financed by way of internal loans from investors, which are drawn down to meet opportunities as they arise. There are no minimum capital requirements but no pure capital can be returned to investors except on the winding up of the partnership.
Set-up costs
These vary between £25,000 for a simple JV property-owning limited partnership, to between £50,000 and £100,000 for the use of a limited partnership as a full property fund investing on a portfolio basis depending on the complexity of the documentation. Set-up costs will commonly be a first draw on investor commitments. These are normally capped at around 1% of total investor commitments so far as attributable to legal costs.
Corporate governance
A limited partnership must have a general partner ("GP"), who is the only partner with the authority to commit the partnership to a binding contract. Limited partners (the investors) may not participate in the management of the partnership or may risk losing their limited liability status. The GP will normally be a corporate SPV, owned or controlled by the fund's sponsor. In JV limited partnerships, the GP may be jointly controlled by the JV investor/parties.
Taxation of current income in the UK
Limited partnerships are tax transparent for UK tax purposes. An investment partnership will not generally be regarded as carrying on trade in its own right. Therefore, the income tax payable by the investors will depend on their individual circumstances. This means that a UK limited partnership is a suitable vehicle for participation by UK tax-paying and tax-exempt investors (for example, charities or pension funds).
Taxation of capital gains
For UK CGT purposes, all investors are regarded as owning a fractional share of each underlying property investment. When a property investment is disposed of by the partnership, each investor is therefore regarded as disposing of their share, corresponding to its profit-sharing interest. CGT charges can arise during the life of the partnership when new partners are introduced if there is a revaluation of the partnership's assets. Otherwise any capital gains tax payments should be deferred until the final disposal of the underlying property.
Regulatory control
Except in the case of certain pure JV limited partnerships, where each participant carries on a commercial business to which the JV partnership is ancillary (for example, property development), a limited partnership used as a property fund will normally constitute an unregulated collective investment scheme. This means that it can only be operated by someone who is authorised and regulated by the UK Financial Services Authority ("FSA"). Under UK regulatory rules the promotion of interests in such a partnership is also restricted to professional and institutional investors who meet specific criteria. Promotion is usually undertaken by an FSA authorised and regulated sponsor/manager.
Limited liability for investors
Yes, so long as they do not participate in the management of the partnership.
Ability to invest outside the UK
Yes, often through intermediate and local property holding companies.
Flexibility of terms
There is flexibility to ensure an appropriate balance of powers and controls between the sponsor-manager on the one hand, and the investors on the other (subject to the prohibition of investors participating in the operation of the partnership). Investors can set up an "advisory committee" to make certain key decisions. They may also reserve consents for major matters affecting the partnership, for example, in relation to amendments to the partnership agreement or to the partnership's investment policy.
Borrowing and the provision of security
A limited partnership, acting through its GP, can borrow and provide fixed security but not a "floating charge" over all the assets and undertaking of the partnership. In practice, this is not a problem.
B. INVESTMENT WITHOUT A PERMANENT ESTABLISHMENT - LIMITED LIABILITY PARTNERSHIP
Minimum capital
None. There is no distinction required between the capital and the loan commitments from investors.
Set-up costs
As for a limited partnership.
Corporate governance
Although an LLP has its own corporate identity, as distinct from its members, it has no share capital but instead has "membership interests". These can be classified into different types in much the same way as share capital. The LLP is run by a management committee appointed by its members. It can have a corporate managing member if desired (which can be a separate LLP).
Taxation of income in the UK
An LLP is tax transparent for UK income tax purposes: the members of the LLP are treated like partners in a general partnership. However, an LLP is not tax transparent for CGT status exempt investors, for example, pension funds.
Taxation of capital gains
The LLP is tax transparent except for CGT status exempt investors (for example, pension funds, personal pension schemes and charities).
Regulatory control
LLPs are subject to UK company legislation so are required to produce accounts and to observe various company law rules relating to the maintenance of capital.
If the management of the LLP is delegated to an operator/sponsor, it can be deemed an unregulated collective investment scheme. Alternatively, it can be structured so that it does not amount to such a scheme where key financial decisions concerning the underlying property are reserved to all of the members/investors.
Limited liability for investors
Yes. Members are not liable for the debts and obligations of the LLP. All members have a right to be involved in the business of the LLP, unless stated otherwise in the members' agreement. It is possible for a member of an LLP to share co-liability with the LLP itself if they have assumed a personal advisory responsibility other than as a member of the LLP. Certain provisions allow recapture of profit distributions made to LLP members during the two years prior to an insolvency, but these are unlikely to apply in the case of a well-run LLP with a prudent distribution and reserving policy.
Ability to invest outside the UK
Yes, but attention must be paid to the tax treatment of an LLP in other jurisdictions since it will not always be regarded as tax transparent.
Flexibility of terms
Yes. The LLP is governed by a detailed members' agreement.
Borrowing and the provision of security
Yes. The LLP has full powers in the same way as a limited liability company.
C. INVESTOR SYNDICATE TRUST
Minimum capital
None.
Set-up costs
This normally costs less than setting up an equivalent limited partnership or LLP but tends to be used for single properties.
Corporate governance
The trust is run by trustees - normally two corporate trustees - owned by the sponsor/manager of the syndicate. The trustees generally delegate the day-to-day management of the property to a property manager who will make recommendations on key decisions, for example, purchase, sale, rent review and significant leasing.
Taxation of current income in the UK
Regarded as tax transparent provided it is not a collective investment scheme.
Taxation of capital gains
As above.
Regulatory control
Not applicable, provided it is not a collective investment scheme.
Limited liability for investors
Yes.
Ability to invest outside the UK
Yes.
Flexibility of terms
Yes.
Borrowing and the provision of security
Yes.
D. PROPERTY UNIT TRUSTS
Below is a brief summary of the various categories of unit trust which can be used for investment in UK property.
An exempt unauthorised unit trust is a vehicle for collective investment. This often includes commercial property and is used where the participants are confined to UK tax-approved pension funds, personal pension plans and charities. These schemes are commonly set up as feeder funds for other types of property investment vehicle, for example, a limited partnership. They work on the basis that the participants are all CGT status exempt, so that the gains realised by the trustees are exempt because of the trust's tax transparent status. Income accruing to the trust is not exempt from income tax in relation to the participating pension funds, but this is often absorbed by the running expenses.
A Jersey property unit trust ("JPUT") is frequently used as a feeder for other types of UK fund vehicle and is suitable for participation by different kinds of investor.
An FSA authorised property unit trust is a retail fund suitable for marketing to the general public. This provides for a mandatory spread of investment across the trust's properties, and specifies detailed investment diversification and concentration limits. It is exempt from capital gains tax in relation to the gains made by the fund. These unit trusts are not widely used for institutional investment because of the applicable restrictions and high degree of regulation.
An FSA authorised qualified investor property unit trust is a more flexible but regulated vehicle. This has been designed for property investment by institutional and other professional investors whose appetite for risk, and need for liquidity and diversification, is not as great as that of retail investors. There is considerable flexibility as to terms and investment policies, and investment can involve real estate outside the UK. The last two vehicles described can take the form of open-ended investment companies with variable capital, which are governed by the same set of UK FSA rules.
Minimum capital
No minimum capital requirements but for an FSA authorised fund, or indeed for any fund, there must be a commercial viability threshold agreed in the context of the fund's investment objectives. This may involve a relatively small equity element, given that gearing ratios of up to 85% non-recourse are not uncommon.
Set-up costs
£50,000 to £100,000 dependent on the type and complexity of fund.
Corporate governance
The trustee will act as the custodian and overseer of the fund, which will be run by an FSA authorised manager in the UK.
Taxation of current income in the UK
Normally subject to income tax but income can be offset against loan costs and running expenses to minimise tax exposure. Income tax may also be reclaimed by investors in an exempt unauthorised unit trust.
Taxation of capital gains
Exempt either by virtue of FSA authorised status or the trust's non-UK resident status.
Regulatory control FSA authorisation of the vehicle for approved property unit trust schemes, or of the manager where the unit trust scheme is an unregulated collective investment scheme. In the latter case, the promotion and operation of the unit trust must be carried out by an FSA-authorised person.
Limited liability for investors
Yes, in relation to the amount which each investor has agreed to subscribe to the unit trust. JPUTs, however, operate on a drawdown basis, normally tied to investment opportunities, rather than involving an upfront payment.
Ability to invest outside the UK
Yes, but this is subject to restrictions in the case of a retail property unit trust.
Flexibility of terms
As above.
Borrowing and the provision of security
This will depend on the type of unit trust concerned. Prudent loan to value links will commonly be included in the borrowing power which will also be expressed to be non-recourse to investors in the unit trust (to ensure investors cannot be responsible beyond the amounts they have agreed to pay to the fund or beyond the value of its property investment portfolio).
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