Throughout the UK, and particularly in London, a range of residential and commercial property assets are held in a 'corporate wrap', the corporate entity often being incorporated and established offshore. This is done for a mixture of tax related and regulatory reasons. Where a number of investors are pooling their resources to invest in or develop UK real estate assets, the decision is often taken to have such co-investment take place via an entity established offshore in a jurisdiction perceived to have a lighter regulatory touch than the UK in respect of co-investment arrangements.

Using a corporate vehicle to hold the property assets allows the sales and purchases of the underlying asset via the sale/purchase of the corporate vehicle which owns it. The intention is to avoid property transaction taxes such as SDLT (Stamp Duty Land Tax), and to incur instead lower corporate transaction taxes such as stamp duty.

The overall tax benefits of holding UK residential real estate in a corporate wrap have been reduced by several recent legislative changes. Any tax driven decisions as to how to hold a UK real estate investment (whether residential or corporate) requires a detailed assessment of a range of potential taxes and tax related issues. We set out the key considerations below.

Due diligence

It remains the case that a significant number of the real estate assets (both commercial and residential) which are being sold and purchased currently in the UK, and especially in London, are being sold and purchased via such corporate wraps.

It is worth remembering that on a sale/purchase of the shares, or other interests in a corporate entity which holds UK real estate, the real estate itself is not transferred between the buyer and the seller. It remains owned by the corporate entity being sold. Nevertheless, the same buyer's property-related due diligence is required as on a sale of the property itself. For example, title to the property still needs to be investigated, albeit that it is the corporate entity and not the seller of that entity whose title to the property is under the spotlight.

Since the buyer is buying the corporate entity which owns the real estate asset, it also needs to conduct due diligence on that entity and its business. By buying the entity, it will be acquiring all of the assets and liabilities owned and owed by it. The liabilities of a corporate entity may include a whole range of commercial, banking and tax liabilities, which need to be taken into account. The purchase contract will need to deal with those corporate assets/liabilities and how they are to be treated. For example, are some liabilities (e.g. third party or shareholder loans) to be repaid at completion and is the seller of the corporate entity to give warranties and/or an indemnity in respect of other liabilities? Perhaps part of the purchase price will be put into an escrow account for a period to allow for breaches of such warranties to come to light and claims to be made.

The same care will also need to be taken in relation to due diligence on and contractual protection for title to the shares, or other interests being acquired in the corporate entity. After all, if a seller turns out not to own or has encumbered such shares/interests, the fact that the corporate entity owns the property in question is not much comfort to the prospective buyer.

Corporate structures

Often the corporate ownership arrangements are more complex than a single company or other corporate entity owning a real estate asset. The corporate structure may for instance be an English limited partnership with a corporate general partner (whose function is to manage the partnership) and a limited partner (the investor entity in the partnership), which is an offshore entity such as a JPUT or GPUT (Jersey or Guernsey Property Unit Trust) that is in turn owned by the ultimate investors in order to facilitate transfers of the investment with optimum tax and regulatory outcomes. The real estate asset itself will typically be held by nominee companies on behalf of the partnership and shareholder or investor loans will often be 'stapled' to the interests in the JPUT or GPUT and in the general partner.

In this scenario a buyer of the real estate asset via the corporate route would need to ensure that it acquired all of the vendor(s)' interests in the structure, both in the general partner, the JPUT or GPUT, and (if the loans are being acquired rather than repaid) in the loans.

Where the buyer is not acquiring the whole of the corporate structure in which the real estate asset resides, for example where the buyer is buying out only some, but not all, of the investors in a project, additional care needs to be taken. It is important to analyse which interests need to be acquired, whether they can lawfully be acquired (taking account of pre-emption rights for example), and what rights and duties the acquisition of these interests carries viz-a-viz the project as a whole and the management and investment vehicles in particular.

We in the corporate real estate department at DACB are well versed in all transactional and non-transactional aspects of such arrangements, and have acted on a number of substantial transactions of this type over the past year. Our tax department is well placed to advise you on all tax related aspects to buying, holding or selling such corporate real estate investments.