All questions

Structuring the investment

Most law as pertains to investment structures (for example, tax law) is made at a UK level. Consequently, the various on shore and offshore real estate investment structures available in England and Wales, are available, almost identically, in Scotland.

Most real estate in Scotland is held by Scottish or UK incorporated companies. These are tried and tested vehicles that allow for whole or fractional ownership and offer investors the benefit of limited liability to the extent of the capital they input. However, they are rarely an ideal structure for foreign investors as tax applies at UK rates.

Non-UK companies are free to own property without limit, providing they have capacity to do so within their own jurisdiction, being a jurisdiction recognised by UK law. UK taxation applies to rental income from property located within the UK, but there is no UK corporation tax to pay and in most instances capital gains tax does not apply.

Offshore unit trust structures, PAIFs and REITs apply to Scottish real estate, with identical tax advantages as elsewhere in the UK. In addition to these structures, Scots law offers a unique variant in the form of the limited partnership, commonly used to structure funds.

The Scottish limited partnership (SLP) is a standard Scottish partnership formed in compliance with the Limited Partnership Act 1907. An SLP is very similar to an English limited partnership in that it is formed of one or more general partners who run the business and carry the risk and one or more limited partners who passively invest in the enterprise, with risk limited to the loss of the capital they have contributed. This makes SLPs a particularly attractive vehicle for multi-party investor structures where management and control of the fund is maintained by, or on behalf of, the general partners.

However, the SLP is crucially different from English limited partnerships in two related aspects: it has a separate legal persona distinct from the partners who compose it and it has the capacity to enter into contracts and to hold property directly on its own account. This added dimension means the SLP is very useful in fund structures as both carried interest vehicles (representing the fund manager's interest) or feeder vehicles (representing the investors' interest).

Despite having a separate legal persona in the same way as a limited company, SLPs are taxed on a partnership basis, with UK tax authorities looking through the SLP and assessing profits and capital gains in the hands of the individual partners. This is known as 'tax transparency' and makes SLPs a useful tool in the context of tax structuring, enabling a more tax efficient structure to deliver value to the SLP's investors. Where an SLP is not trading within the UK, no UK tax will be payable by partners who are resident outside the UK.

Until recently, SLPs were not obliged to disclose details of beneficial ownership. This increased the risk that they could be subject to abuse by the unscrupulous and indeed there have been high-profile instances of their misuse. In 2017, The Scottish Partnerships (Register of People with Significant Control) Regulations 2017, introduced following a government consultation, sought to tackle this issue, making it mandatory to submit to Companies House details of all 'persons with significant control'. The measures were introduced to improve the transparency of SLPs and to meet the UK's obligations under the EU's Fourth Money Laundering Directive.

Foreign investment

Scotland mirrors the UK in being a very open economy. There are no restrictions to owning or transacting with Scottish real estate based on the domicile of the investor. Similarly, there are no currency controls or additional transactional taxes pertaining to a party because it happens to be foreign.

The capacity of a corporate investor to deal with Scottish real estate generally stands to be determined by the jurisdiction where the corporation is formed. An opinion as to that capacity will almost always suffice as evidence of that capacity.

Scotland has a long history of attracting inward investment. In 2017/18, it was the most attractive part of UK for foreign investment, outside London and the south-east of England. The bulk of this investment is allocated to trading businesses, but this provides additional underpinning to the property investment market.