Property is becoming increasingly popular as an accessible and lucrative form of investment. But many people underestimate the importance of the legal side of property investment, and this can lead to your property portfolio not growing as it should, or it becoming a damaging financial burden. This is usually because your investments are not structured properly or you have not protected yourself legally, bringing potential tax implications and unwelcome costs.
There is no defined method for how you should structure your property investment, this is largely dictated by your personal circumstances, in terms of your capital, your investment goals and who, if anyone, you are partnering with. It also depends on what kind of investor you want to be, ie. a property developer, a passive investor, a hands-on buy-to-let landlord or any combination of these.
Different legal structures to property development
There are two common forms of structure for a property investment business:
This is probably the most popular and most efficient structure and is also known as a Special Purchase Vehicle (SPV). Forming a limited company works whether you are buying a property, developing a property or looking to buy and sell quickly, known as ‘flipping’. Principally, the benefits of a limited company are as follows:
- Tax efficient – It is more tax efficient to receive dividends from a limited company than through direct rental income.
- Flexible – You can form a limited company for each property in your portfolio and hence can have a different ownership structure, with different people, for each property.
- Risk-managed – You can create a hierarchical structure of a trading and holding SPV, which means that the risk sits with the trading company but the profits and tax efficiencies go to the holding company.
- Cheaper sale – Stamp duty on the purchase of shares is charged at 0.5%, which is lower than land tax stamp duty, so it is cheaper to buy or sell the property through a limited company.
- Easier sale – A portfolio of properties is easier to sell as a complete set through a company, ie. a ‘going concern’, than as individual properties.
A Joint Venture is common where an investor owns or buys land and partners with a builder or developer with a view to them working on the project together and sharing the profits. A Joint Venture Agreement is an important document, as it defines how the risk is spread, as well as expenses and costs incurred. The agreement also defines roles and responsibilities and documents what to do if the property doesn’t sell.
This type of structure is good for projects where one partner owns land or buildings but can’t raise the necessary capital to develop them, nor do they have the skills. A joint venture shares the risk and enables you to partner with the right people in a legal and practical sense.
How to protect the finance of your property investment
Often investors lend money to a developer for a property purchase or for development costs, but this can involve risks. A loan agreement is a properly drawn-up document which protects both parties in this instance, in terms of repayment structure, and it sets out a process for recovering this money if it is not repaid. This loan agreement can also document what security has been put forward in order to avoid complex discussions at a later date.
Legal charges are also common when dealing with property investment. These act as a kind of mortgage. The beneficiaries of a legal charge receive the proceeds of any sale and this can be used to secure a loan agreement. A different form of legal charge is a debenture. This can be put in place on a company that receives a loan and represents a legal charge on some, or all, of the associated assets of the company, such as property. This can act as an alternative or supplementary security to a legal charge.
Where an investor wishes to bequeath a property portfolio to spouses, children or grandchildren, they need to be aware of the tax implications. Property companies set up purely to hold property will not ordinarily qualify for Business Property Relief (BPR), so you need to plan ahead to ensure you don’t overpay tax. Many investors avoid this and minimise their tax obligations by setting up trusts, holding companies or separate trading businesses. These can be used for the same purpose but are defined as other businesses, such as letting agents or development companies. This way you can maximise the BPR you receive.
Specialist investment advice
It is always recommended to get specialist advice when investing money, in this case from a corporate/commercial lawyer, who can advise on land and building investment and structure, and the related tax and cost implications. This advice will also help you plan ahead and develop long term strategies for your property investment and for getting the most out of your property portfolio.
For expert property investment advice, call our Yorkshire solicitors today on 0113 284 5000.