LAWYERS TO THE REAL
ESTATE & CONSTRUCTION
INDUSTRY
www.klng.com
Spring 2006
Overriding Interest
Pros and Cons of LLP v
Company as investment vehicle
If you are considering acquiring UK
property interests, you need to give
some thought to the best vehicle to use
to acquire the interests. The following
article considers two possible vehicles,
a company and a limited liability
partnership from a tax perspective:
Capital gains on properties
The greater tax efficiency of
holding property via an LLP is
increased by taper relief. Members
are eligible for non-business asset
taper relief, reducing higher tax rate
from 40% to 24% after 10 years'
holding of an investment asset.
This is generally more favourable
than indexation available to
companies. In addition the higher
rate of taper relief for business
assets is available in limited
circumstances (eg. where a property
is let to individuals or partnerships
with an individual member).
Capital gains on disposals of
interests
Generally capital gains on disposals
of shares and LLP interests are
taxed at the same rate ie. nonbusiness asset taper relief if the
company/LLP is an investment
vehicle. But where investors hold
less than 10% shares in a company
and are all directors (even parttime), they would qualify for
business asset taper relief on the
disposal of their shares. Higher rate
taxpayers holding their shares for 2
years would pay only 10% tax on
disposal.
Direct Tax
Tax transparency
LLPs are transparent for income
and gains, avoiding extra layer of tax
in investment vehicle. Profits/gains
of LLPs are apportioned between
partners giving an aggregate tax
charge of 40% tax for higher-rate
taxpayers. Contrast profits and
capital gains of a company: taxed at
19%-30% (the 0% starting-rate for
companies has been abolished from
April 2006) and then subject to
further tax (at 25% for higher-rate
taxpayers) when distributed to
investors by way of dividend.
Accordingly, for a higher rate
taxpayer, and assuming the
company pays tax at 30%, for every
£100 profit in the company, there is
£30 corporation tax and a further
£17.50 income tax for the
shareholder on the dividend.
continued on page two
Welcome to the Spring Edition.
The government's proposals for a UKREIT have taken a bit of a clobbering
recently with many existing property
companies thought unable to convert.
The 10% shareholding restriction, a
consequence of tax treaties, is not
movable but the BPF, IPF and RICS, who
have made a joint submission, are
hopeful of securing some exceptions.
The gearing limit of 40%, designed to
encourage more equity involvement, is
seen as too rigid but the plea that the
market should be allowed to define a
suitable level will presumably not
succeed. The conversion charge will
not be known until the budget and
now there may be penalties on the sale
of development properties within three
years of completion. Given the
economic benefits of these kinds of
vehicles, hopefully government and the
industry will find a way to make the
"unworkable" proposals work.
Contents
Pros and Cons of LLP v Company
as investment vehicle
1
Legal developments
2
Spring deals
3
Legal cases
4
Who to contact
4
Overriding Interest
continued from page one
If a new investor joins as a member
of an LLP, this can give rise to a
part-disposal of the underlying
property by the existing members.
This is not the case when a new
shareholder subscribes for shares in
the company.
2
Indirect Tax
Transfers of interests in the
investment vehicle - stamp duty is
payable on share transfers at 0.5%.
Stamp duty land tax is payable on
transfers of LLP interests at 4%
above £500k.
VAT - registration is compulsory for
companies and LLPs with a taxable
turnover of more than £60k.
Property transfers to companies and
LLPs will generally be VAT
exempt unless the property has
been opted. Both LLPs and
companies can form part of a VAT
group.
LLPs are only transparent if they
carry on a business with a view to
profit. Liquidation of an LLP can
make it a body corporate taxed as a
company.
Capital losses cannot be
surrendered by a company to
individual shareholders; in an LLP,
losses are apportioned between
members to set off against their
current or future gains.
Deductions - interest payments on
loans for property acquisition and
refurbishment are generally
deductible for investors in LLPs
and companies. For investors,
interest on loans to purchase shares
or LLP interests will not be
deductible.
In the case of property investment
LLPs, pension fund investors lose
their UK tax exemptions on income
and gains. Similar disincentives
operate for insurance companies. So
the LLP is not seen as an attractive
vehicle where institutions are
possible future investors.
UK LLPs may not be considered as
tax transparent in overseas
jurisdictions. Non-resident
investors should consider the tax
implications carefully.
SPRING 2006
Stamp duty on acquisitions of UK
property - companies and LLPs
both subject to stamp duty land tax
at 4% on acquisitions above £500k.
Legal
developments
In our Autumn 2005 edition we
reported on the new fire safety regime
originally planned to come into force
on 1st April 2006. However, the
government announced last month
that it is giving more time to
businesses and enforcers to familiarise
themselves with the new regime and
has put back the implementation
date. There will be a series of guides
available to assist those preparing fire
assessments before the law comes
into force. According to the ODPM "a
new date will be announced as soon
as possible".
In our next edition we will include an
article on the new pilot projects which
were launched recently by the
Housing & Planning Minister. The
Planning Delivery Agreement pilots
are intended to improve and speed up
the planning process for large and
complex developments. The
intention is to provide a project
management framework so that
developers, local planning authorities
and other stakeholders are working
together to an agreed plan.
Those readers involved in the area of
residential enfranchisement are likely
to be familiar with last September's
Lands Tribunal decision of Arbib -vCadogan which brought about a sea
change in the assessment of
deferment rates. The Lands Tribunal
is now planning a further "grand
assize" in this area for the end of
March. It may reinforce Arbib but
equally it may step back from it as
Arbib has come in for some criticism
from practitioners. We will report on
the outcome.
HMRC takes the view that an LLP
cannot be the parent of a group of
companies for SDLT (and stamp
duty) group relief purposes.
www.klng.com
Spring
deals
Bank of Ireland
We acted for Bank of Ireland in
relation to the £55 million financing
of the acquisition of a shopping
centre in Nuneaton by a private
Irish investor. Real Estate partner
Neil Rainey handled the
transaction.
Anglo Irish Bank
We continue to act for Anglo Irish
Bank in relation to their £61 million
investment and development loan
facility to an established borrower
secured against a mixed range of
commercial and industrial
properties. Real Estate partner
Redmond Byrne and Banking
partner Richard Williamson lead
the K&LNG team.
Arena Leisure Plc
We acted for Arena Leisure Plc in
relation to its agreement with
Doncaster MBC to redevelop the
Doncaster Town Moor Racecourse,
home of the classic horse race, the
St Leger. The redevelopment will
cost a projected £32 million
involving the building of state- ofthe-art facilities, including an
exhibition and conference centre
and accommodation for racing
professionals. Corporate partner
John Elgar led the K&LNG team.
Real Estate partner Steven Cox
dealt with property issues.
Furlong Hotel Group
We acted for the Furlong Hotel
Group on the sale of three signature
hotels - The Lygon Arms, Combe
Grove Manor and Billesley Manor
to the Paramount Group for
£41million. Corporate partner
Howard Kleiman led the
transaction with Real Estate partner
Steven Cox handling the property
aspects, assisted by associates Fiona
McPhillips and Chris Major.
SPRING 2006
3
Overriding Interest
Legal cases
Restrictive Covenants
Rectification
Repairs
A restrictive covenant imposed in 1952
that would have prevented the erection
of a second house and garage in the
grounds of a house was modified under
s.84(1) of the LPA 1925 on the basis that
the proposed use was a reasonable longterm one.
A lease break clause, to be effective,
required the tenant to comply strictly
with its covenants following service of
notice by the "landlord". The lease
should have provided for notice to be by
the "tenant", and the lease terms were
not complied with. Rectification was
ordered and the break was held to be
ineffective.
An underlease was granted that
contained provisions regarding the
payment of a tenant's contribution
towards repairs which mirrored those in
the headlease. It was held that, on a
true construction of the underlease as a
whole, the undertenant had
responsibility for repairing an area of the
roof but could recover a contribution
from the headlessee.
Comment: Potential temporary
disturbance from the construction work
was disregarded.
Shephard -v- Turner, CA
Comment: As the clause stood, it was a
commercial nonsense and could not
have been intended.
Rights of Access
Littman -v- Aspen Oil, CA
Where a lease was granted that
contemplated that the tenant would
undertake improvement works and then
a licence granted for access to the
landlord's retained land to undertake
that work, it was held that, in the
absence of evidence to show that the
work could only be carried out using
scaffolding, the tenant had no right to
erect such scaffolding on the landlord's
land.
Comment: More compelling evidence
may have resulted in a different
outcome for the tenant.
Comment: The Court made clear that
its decision turned on the specific facts
of the case.
Delgable -v- Perinpanathan, CA
Damages
Where a landowner built a wall that
encroached on a neighbour's land but
damages were awarded to the neighbour
in place of an injunction to remove the
wall, those damages were assessed on
the basis of the value added by the
encroached land rather than the loss to
the neighbour.
Repairs
Comment: The damages awarded were
doubled by this method of assessment.
Comment: A further case of
insufficiently clear drafting causing
problems of interpretation.
A landlord's obligation in a lease to
repair and maintain the "main structure"
of a property divided into flats was held
to include the timber floors of the flats.
That work was said not to be covered by
the tenants' repairing obligations in
respect of the flats.
Horsford -v- Bird, PC
Marlborough Park Services -v- Rowe,
ChD
Europa 2000 -v- Keles, CA
Who to Contact
For further information contact
Steven Cox
scox@klng.com
T: +44 (0)20 7360 8213
Milton McIntosh
mmcintosh@klng.com
T: +44 (0)20 7360 8259
Susan Henning
shenning@klng.com
T: +44 (0)20 7360 8236
Kirkpatrick & Lockhart
Nicholson Graham LLP
110 Cannon Street
London EC4N 6AR
www.klng.com
T: +44 (0)20 7648 9000
F: +44 (0)20 7648 9001
Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle market
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4
SPRING 2006
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