Sometimes, buying a property can involve acquiring more than just bricks and mortar. Many higher value residential properties are held in “corporate wrappers", which means they can be purchased by acquiring the shares in the company which owns the property (often referred to as a special purpose vehicle, or SPV), rather than buying the property itself.
The main motivation for many buyers in buying an SPV, rather than buying the property itself, is to save Stamp Duty Land Tax (SDLT). This tax can be charged on the purchase price at rates of up to 17 per cent, thereby adding significant additional costs. On the face of things, it is therefore no surprise that, where there is a choice, sellers are often able to persuade buyers to buy the SPV rather than the property.
However, buyers should be aware that the SDLT saving they may have been offered is not always all it seems. SDLT can be charged on an SPV purchase in a range of situations. All too often this is not identified until late into the transaction, at which time there may be a limit as to what remedial steps can be taken and transactions are frequently abandoned as a result.
This briefing explains why there can be an SDLT charge on SPV transactions, even those which might have been sold as “SDLT-free” sales of “clean companies”, and what steps prospective buyers can take against this.
When is SDLT payable on the purchase of an SPV?
A basic premise of SDLT is that it applies only to land transactions and not, for example, to transactions in the shares of companies (although stamp duty on shares may be payable instead). On the face of things, the very nature of an SPV purchase should therefore mean no SDLT is payable since this takes the form of a share purchase.
However, there are a range of tax costs and legal risks that can come with holding a property through an SPV (see our briefing here). Partly as a result of this, it is very common to find that an SPV sale also involves one or more transactions in the property itself, which can drag things into the scope of SDLT. A good example is buyers who intend to “de-envelope” after buying an SPV, to remove the property from the company and hold it in their personal capacity. This is often done to reduce the ongoing tax, compliance and administrative costs and risks associated with holding some residential properties in companies.
Prospective purchasers are often advised (or assume) that land transactions such as de-enveloping will not trigger any SDLT on the basis that no purchase price is paid. However, SDLT legislation can deem a price to be paid, and resulting tax to be chargeable, in a range of scenarios, irrespective of whether any cash actually changes hands. For example, where there is debt secured on the property (perhaps a mortgage or a shareholder loan) these deeming rules can trigger an SDLT charge on the value of the debt or the property.
The rules in this area are complicated and take time and expert advice to navigate. However, to give one example this risk often arises whenever an SPV transaction involves both a transaction in the property itself (such as a de-enveloping, liquidation or distribution) and also a change in the rights or liabilities of any debt. A common example is where the SPV owes money to its old owner (the seller) and the transaction involves the buyer either replacing that debt with a new shareholder loan, or where the debt is written off as part of the mechanics of the deal. In various cases, this can trigger a significant SDLT liability that could undermine the whole transaction. Experience shows that this is all too often overlooked at heads of terms stage when deals are struck and expectations set.
What can be done to reduce the SDLT risk?
The very simple answer to this question is to instruct lawyers (importantly, including tax specialists) to carry out due diligence on the SPV and deal structure at the earliest possible stage. Only by fully investigating the structure in the context of the SPV’s legal status, potential liabilities and relationships, can SDLT and wider tax and legal risks be identified early enough to take action.
SPV transactions are frequently suggested by sellers on the premise that the company in question is “clean” and has no risks or history, but experience shows that this is very, very rarely the case once due diligence is carried out. Almost all so-called “clean” SPVs come with actual, latent or potential tax and legal costs and risks that can crystalise when they are bought, or when the property is de-enveloped. Of all these risks, SDLT is often the one with the greatest potential to derail the transaction altogether, since the whole reason for acquiring an SPV rather than the property itself is often to save SDLT.
If due diligence identifies a potential SDLT risk, it may be possible to reduce or eliminate that risk by restructuring the transaction. At the most straightforward, it may be possible to restructure so that no land transaction takes place in connection with the SPV purchase, which should eliminate any immediate SDLT risk. However, that will naturally have wider ramifications on the deal and the buyer’s planning as it may mean, for example, that de-enveloping is no longer a possibility. In that case, the buyer may have to swallow unanticipated costs and risks by keeping the property in the SPV, which is unlikely to be attractive.
There is no single solution to reducing or eliminating the SDLT on these sorts of SPV transactions. Each transaction is bespoke and no buyer or seller has the exact same priorities. Without expert advice at the earliest opportunity, the legal principle of “buyer beware” should prevail and buyers should not assume that buying an SPV will always reduce their SDLT liability.
If you require further information about anything covered in this briefing, please contact James Bromley, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2021