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The Rise of the Corporate Structure

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Knight Frank
London and Country specialist property buying agents
27 Sep 2016  |   Philip Eastwood

ATED (Annual Tax on Enveloped Dwellings) was introduced following the 2012 Budget to close a loophole and ensure that individuals – resident, non-resident and companies – pay their fair share of tax on UK residential property. However, it did not become law until it was introduced on 1st April 2013 as part of the Finance Act 2013. The package of measures introduced by the government were designed to discourage the use of enveloping properties within companies, and encourage the de-enveloping of properties already held by non-natural persons and to tax those who continue to hold them in this way. As such during this period there was a rush to start de-enveloping properties and take them out of corporate structures. However those who didn’t are now starting to see some benefits.

As part of the Finance Bill, for the first time Capital Gains Tax (CGT) was introduced on the growth in the value of properties, even for non-UK resident entities. For clarity, all property held by non-natural persons were rebased in 2013, so any gains accrued before this were written off. As the markets begun to rise, the companies gained latent CGT liabilities, however with Stamp Duty (SDLT) changes, Brexit and subsequent price falls, these pregnant gains have been negated as prices have returned to the levels last seen in 2012/13. As and when the opportunity presents itself, we have seen an increase in interest to buy the corporate entity, by way of SPA (Share Purchase Agreement) rather than just a straightforward asset purchase. The advantage of a SPA is that it is not subject to SDLT and therefore the savings are sizable. With the recent addition of a 3% surcharge for second homes, regardless of where your primary residence is in the world, the saving on a £5m purchase could be in excess of £650k. Vendors benefit as often there is a “sharing” of the saving by way of an increased purchase price.

There are however some disadvantages, you will be subject for ATED charges, which on a £5m property is £54,450 p/a (although on the flip side, the saved SDLT monies can be invested, and at this rate it would take 11 years to break even). Lawyers’ fees can increase threefold, as corporate due diligence is much more in depth than straightforward conveyancing. However it is also undeniable that both solicitor’s and bank’s appetites for this sort of structuring, in light of the government’s anti-avoidance schemes, is waning and as such owning property in this way will only get more punitive.

Every client’s tax position is different, so specialist tax advice is required, and whilst I don’t advocate tax avoidance, for the right client with an appetite for risk, there are clearly some financial advantages.

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