Buying a company that owns a property? Tax Advantages and What to look out for!

By: Mr Anuj Paudel

In recent years, we've observed a significant change in the real estate market. The escalating rates of stamp duty land tax (SDLT) have prompted many prospective buyers to reconsider direct property purchases. Instead, they're opting to acquire the company that owns the property. This approach can lead to substantial savings, especially when dealing with high-value properties.

The Financial Logic: When you purchase a company rather than a property, you only pay 0.5% stamp duty on shares for companies registered in England & Wales. In contrast, direct property purchases can attract SDLT rates as high as 15% for luxury properties. This financial distinction can result in saving hundreds of thousands, if not millions.

Example in Context: Consider a property priced at £10 million. Directly buying it might incur an SDLT bill of £1,413,750. However, purchasing the company that owns this property results in a significantly lower tax liability, making it a financially savvy decision for investors.

Steps in Corporate Transactions

Here's a more detailed look at the processes involved in such transactions:

1. Early Planning and Heads of Terms: The initial step involves drafting a comprehensive understanding of terms that encompass not just the property but all aspects of the company's operations. It's essential to have clearly defined objectives and expectations to guide the transaction forward smoothly.

2. Information Gathering: Issue an information request list to the seller's solicitors to gather detailed insights into the company's operations and financial health. This helps identify any potential red flags early.

3. Due Diligence: Perform a thorough investigation into the company. This includes analysing financial statements, existing contracts, potential lawsuits, debts, and property titles. It should also involve checks on regulatory compliance and environmental assessments of the property itself.

4. Drafting Legal Agreements: Work closely with legal advisers to draft and negotiate the Share Purchase Agreement (SPA). This crucial document outlines all terms of the purchase, protecting you contractually.

5. Collaboration with Advisors: Engage with accountants to evaluate the financial history and with overseas lawyers to ensure compliance with international laws. This multidisciplinary approach mitigates risks across various jurisdictions.

6. Documentary and Legal Compliance: Handle all necessary legal paperwork, including board resolutions, resignation letters of existing directors, and the smooth transition of company shares.

Understanding the Seller and Company

Decoding the structure of the company and its ownership is critical. You need to answer questions such as:

• Is it an SPV?: Special Purpose Vehicles are entities created for specific transactions, often making the purchase cleaner with fewer liabilities.

• Jurisdiction and Control: Understanding the legal jurisdiction of the company is vital, as it affects regulatory compliance and tax implications.

• Existence of Debts and Liabilities: Dig deep into the financial health of the company. Hidden debts or liabilities can significantly impact the value and viability of your investment.

Protecting the Buyer

Ensuring adequate protections during a purchase involves several strategies:

• Warranties and Indemnities: These are assurances from the seller about the company's status and operations. They cover incorporation accuracy, ownership, financial health, and compliance with laws. These are crucial for securing your investment against unanticipated claims.

• Retention Monies: Set aside a portion of the purchase price in escrow. This acts as a financial buffer against possible post-sale liabilities, providing peace of mind during the warranty period.

• Insurance: Invest in insurance policies that cover potential breaches of warranty or adverse findings during due diligence. This can include coverage against tax disputes or regulatory penalties.

• Guarantor: Having a strong guarantor, preferably UK-based, offers additional security. It means there's a reliable party to turn to for enforcement if needed.

Seller Limitations

Sellers will typically seek to limit their liabilities in the SPA. Common limitations include:

• Exclusions for Disclosed Matters: Sellers often resist liability for issues they've disclosed upfront. It's important to thoroughly assess these disclosures and ensure everything is accounted for.

• Financial Limits on Claims: Caps are usually placed on claims, with de minimis thresholds to exclude minor claims and maximum caps to outline the ceiling on potential liabilities.

• No Double Recovery: This clause prevents double-counting or recovering of the same loss under multiple warranties or claims.

Conclusion

It's increasingly important in today's market to start discussions early and plan strategically. Understanding these processes and their implications can transform a complex transaction into a streamlined investment strategy that aligns with financial goals. The allure of structuring these deals as corporate transactions is growing due to the potential for significant fiscal savings and strategic advantages.

I hope this expanded exploration of property acquisition strategies provides valuable insight into navigating today's real estate market. For further queries or more detailed discussion, feel free to connect with me. Stay informed and strategic in your investment ventures!