Investing in the Uk Property part4

Investing in the UK property market

Lawrence Graham: Investing in the UK property market

Lawrence Graham: Investing in the UK property market 1

IntroductionLawrence Graham is a leading UK law firm offering clients legal and business solutions based on practical, commercial advice. We are a full service law firm delivering expert legal advice across all business sectors.We offer our legal services internationally through our Singapore, Dubai, Moscow and Monaco office, through our dedicated India, Brazil and North America desks, and through our strong relationships with law firms throughout continental Europe, Asia, North America and around the world.

Our tax practice has the capability to advise businesses and individuals on a broad range of Real Estate tax issues and structures. We provide a full tax advisory service on direct and indirect tax matters, including tax planning and structuring, as well as tax transactional advice on M&A, funds, banking, restructuring and real estate deals. We advise corporate clients in a wide range of sectors including real estate, energy, renewables and cleantech, natural resources, healthcare, hospitality and leisure, insurance, and investment management. We also act for high net worth individuals and their families in the UK and overseas.

2 Lawrence Graham: Investing in the UK property market

Clients

Our clients operate in a variety of business sectors, most notably in real estate, financial services, hospitality and leisure, and banking. We provide legal advice to pension funds, corporate clients, mutual societies, government, public bodies, charities and social enterprises.

AXA, Brookfield, BMW Pensions, Canada Life, Castlemore Securities, Development Securities, Goldcrest, Henderson, Kajima, LaSalle, Legal and General, Lend Lease, Liverpool Victoria, London & Cambridge Properties, NFUM, Sainsbury’s, Debenhams, Salmon Harvester, Threadneedle, The Crown Estate, UBS, Universities Superannuation Scheme and Zurich.

There is no kind of real estate related advice or transaction that we cannot undertake. Our practice is one of the largest and most respected in the UK, with many top name clients who have been with the firm for years.Our clients rely on us to advise on regeneration and development projects; guide them through construction; planning and environmental matters; manage risks and property disputes; and find solutions to regulatory and taxation issues.

We advise on the acquisition, development, regeneration, management, lettings and sale of all types of properties including shopping centres, office buildings, business and retail parks, hotels and industrial estates.

Commercial real estate

“Clients draw attention to the firm’s promptness and particularly appreciate that ‘its aim is to complete deals swiftly without wasting time.’”

– Chambers UK, 2012



OfficesThe National Farmers Union Mutual Insurance Society Limited (NFUM)

Acquisition of 2 Glass Wharf, Temple Quay in Bristol, a highly desirable development site fronting onto the floating harbour at Temple Quay. Due to a range of development restrictions placed on the site, the purchase became a protracted, complex, highly labour intensive and, at times, delicately balanced deal. Lawrence Graham secured a successful outcome for their client.

AXA

We advised AXA on the acquisition of Thomas More Square and the subsequent disposal to Land Securities for the sum of £240 million. The transaction was exchanged and completed within 3 weeks of instruction.

DevelopmentSainsbury’s Supermarkets Ltd

Lawrence Graham have been involved in the purchase and development of approximately £750m worth of foodstore development. The projects range from solus developments (Sutton/Greenwich London) to town centre regeneration projects (Bicester Town Centre). Lawrence Graham acted in conjunction with not only sellers/developers but other important financial and material stakeholders such as local authorities, government agencies and associated local bodies. Lawrence Graham also executed a £250m sale and leaseback programme which provided Sainsbury’s with additional capital as well as operational and strategic flexibility.

Bracknell Regeneration Limited

Acting for the developer, Bracknell Regeneration Limited Partnership, in relation to the regeneration of Bracknell town centre. Lawrence Graham deal with all real estate aspects of this regeneration project, including site assembly and anchor tenant pre-lets. As part of this, the team have recently advised on a new food store letting to Waitrose (this is Waitrose’s lowest carbon store yet).

Experience


HotelsPrime Knightsbridge Developments Limited

Acting for the owners of the hotel and residences to be known as Bulgari Hotels & Residences, on the development, structuring, procurement, construction, letting and sale of the residences, penthouse apartments and hotel element.

Whitbread Group plc/Premier Inn

Lawrence Graham were the lead advisors on the second sale and leaseback exercise carried out by Whitbread/PI (Lawrence Graham were also lead advisers on the first). The portfolio (consisting of 8 hotels) was sold to nominees of the National UK Pension Scheme.

Hotel portfolio and ongoing management

Acting for the owners of a portfolio of Hilton branded hotels and the owners of a portfolio of Marriott branded hotels on all real estate management issues (including ongoing lettings, licences, concession arrangements and disputes) since acquisition in 2005 and 2007 respectively.

RetailThe Crown Estate Commissioners

Lawrence Graham acted for Crown Estates in its first forward funding and purchase of the Stadium MK Retail Park, Milton Keynes, comprising tenants such as Marks & Spencer, River Island, Primark etc. Lawrence Graham advised on all aspects of the funding and purchase of this development.

Zurich Assurance Ltd

Portfolio sale of four key shopping centres throughout the United Kingdom to New River Retail.

Shopping centres

We have a market leading practice in shopping centres and act for three of the top five largest UK pension funds. Our institutional clients are large holders of shopping centres and prime retail assets and we act for owners and operators of some of the largest shopping centre, retail park and high street retail portfolios in the UK.

Supermarkets

We have a wealth of experience in all aspects of real estate work for supermarkets. Sainsbury’s is a long standing client of Lawrence Graham and we have been involved in approximately £750m worth of foodstore development.


Clients

We act for a broad range of clients ranging from institutional investors and fund managers (such as Axa Sun Life, Universities Superannuation Scheme, Legal & General, LaSalle Investment Management, NFU Mutual, Hermes, Threadneedle, Antler Property Investments, The Pension Corporation and IVG) to developers (such as Development Securities and Brookfield) and real estate funds (such as C2 One Capital Limited Partnership, Dolphin Capital, Japan Residential and VinaLand).

Our traditional strengths in the areas of real estate, investments funds, corporate finance and tax structuring mean we are well positioned to advise on both real estate investment and the structuring of real estate funds. The team has wide ranging experience in establishing and providing ongoing legal advice to UK, European and global funds. The team also has vast experience in acting for investors investing into UK, European and global funds.We are market leaders in establishing indirect real estate investment structures. Our experience ranges from establishing both authorised and unauthorised UK-based investment vehicles to offshore structures. We also act for a variety of institutions and funds investing into both UK and offshore real estate funds and provide a comprehensive ‘due diligence’ service, focusing always on the needs of the investor.

We also have extensive experience of buying and selling real estate assets through onshore and offshore corporate entities, limited partnerships and unit trusts. The team is also well versed in structuring and negotiating joint ventures, with particular expertise in regeneration projects and shopping centre developments.

Real estate investment and funds

“Lawrence Graham LLP fields a ‘very commercial team with excellent response times.’”The Legal 500



Listed real estate funds Dolphin Capital Investors Plc

Advised this quoted property investment fund established to invest in a portfolio of high value leisure and residential resorts in south eastern Europe. The fund raised €109 million on launch; and on secondary issues raised a further €300 million and €450 million with Goldman Sachs and Morgan Stanley acting as joint book runners.

Japan Residential Investment Company Limited

Advised on its admission to AIM and an associated placing which raised £100 million.

Vinaland Limited

Advised on its admission to AIM and an associated placing which raised $117.2 million

Unlisted real estate funds and investment vehiclesTesco Pension Trustees

Advised on a property joint venture structured as a limited partnership with a Jersey unit trust.

Universities Superannuation Scheme

Advised on its joint venture with Tesco Plc structured as a limited partnership with a Jersey unit trust.

LaSalle Investment Management

Advised on two joint ventures with Flodrive Holdings structured as limited partnerships.

Legal & General

Advised on the establishment of four limited partnerships with Jersey unit trusts.

NFU Mutual

Advised on its joint venture with Salmon Harvester Properties Limited structured as a limited partnership with a Jersey unit trust.

Universities Superannuation Scheme

Advised on the acquisition of Eden Walk Shopping Centre through a Jersey unit trust with an underlying limited partnership.

C2 Capital One Limited Partnership

Advised on the launch of the fund structured as a limited partnership and the formation of the fund’s manager structured as a limited liability partnership.

Experience


Investment into real estate fundsUK institutional investor

Advised on its investment into the Goodman European Logistics Fund structured through a Luxembourg FCP.

UK institutional investor

Advised on its investment into the Henderson European Retail Property Fund structured through a Luxembourg FCP.

Acquistions and disposalsLegal & General

Advised on the disposal of Harrow Shopping Centre by way of a sale of a Jersey unit trust.

Development Securities

Advised on the acquisition of Manchester Evening News (MEN) Arena by way of acquisition of a limited partnership.


The accuracy of information concerning registered land comes with a state guarantee, so title insurance is only necessary in limited circumstances.

1. Principal laws governing sale and purchase

Set out below are a number of the main laws that govern the purchase and sale of real estate in England and Wales. It is possible to contract out of the provisions of some of them, whilst others apply regardless of whether or not the seller or purchaser would otherwise be willing to disapply them.

Lawrence Graham are experts in utilising those laws to their clients’ advantage wherever possible.

The legal framework for buying, letting and disposing of property in England and Wales is extremely transparent. Most property is registered at the Land Registry, which means that it is relatively easy to find out who the legal owner of a property is and what rights the property enjoys over other properties, as well as the rights that other properties enjoy over it.

UK commercial property: legal system


to pay a proportion of income from the property up to the freeholder.

Leases where the freeholder is entitled to a proportion of the rents received or receivable tend to be for a term between 99 and 150 years. Lawrence Graham has considerable experience in advising on settling such leases, and also reporting on them for prospective investors who may themselves not be familiar with UK, and particularly London, market practice.

3. Occupational market

Another reason why UK property is seen as an attractive investment is because UK occupational leases usually provide for upwards only rent reviews during the term of the lease. This means that if the market rent has gone down, the actual rent payable under the lease will stay the same upon review, and if it is has gone up, the actual rent will also go up upon review. That way, investors can anticipate returns from an investment property with a greater degree of certainty than would be the case in other jurisdictions.

As with the laws governing sales and purchases, there are various statutes in place that govern relations between landlords and tenants of commercial property, some of which parties can contract out of and some of which they are obliged to adhere to.

Some of the main laws are:

The Landlord and Tenant Act 1927 – this impacts upon alterations and alienation provisions in leases.

The Leasehold Property (Repairs) Act 1938 – this impacts upon repair obligations in leases.

The Landlord and Tenant (Covenants) Act 1995 – amongst other things, this impacts upon privity of contract (i.e. how long after it has assigned its interest a tenant can still be liable for breach of tenant covenants under the lease).

The Landlord and Tenant Act 1954 – amongst other this, this gives a tenant an automatic right to renew its lease, although it is possible to contract out of parts of this act, including the obligation to renew.

Law of Property Act 1925 – this created the current system of two legal estates in land being freehold and leasehold tenure

Law of Property (Miscellaneous Provisions) Act 1989 – this provides what all contracts for sale and other dispositions of an interest in land must be made in writing to be enforceable.

Land Registration Act 2002 (and Land Registration Rules 2003) – this modernised land registration law so as to set in train the complete registration of all land in England and Wales, as well as providing the legal framework for the development of electronic conveyancing.

There are also laws that apply to residential property and can therefore, in some circumstances, apply to properties which are used in part for residential and in part for non-residential purposes. Such laws require transactions and interest to be carefully structured to mitigate the risks of the laws having a negative impact on investments.

2. Principal form of ownership

The two principal property tenures are as follows:

Freehold – freehold title gives the purchaser ownership of the property in perpetuity. It can be affected by covenants, easements charges and leases, but no interest in land is superior to it.

Leasehold – it is not uncommon in England and Wales for freeholders to grant a long lease for a term of, say, 999 years to a third party. Depending upon its terms, that long lease is likely to be of greater value than the freehold, because it will include the right to receive rents from occupiers of the property and, subject to the rights of those occupiers, control of the property. Long leases are typically granted by public authorities, who retain the freehold to keep an interest in the land and landed estates in Central London, who retain freeholds for the same reason and often include a provision in the long lease obliging the long leaseholder


Mitigating, or trying to eliminate, taxes on distributions and interest payments at the SPV and holding company levels so as to achieve tax-efficient repatriation of investment returns to investors;

Providing, wherever feasible, flexibility on the sale of investments (by making it possible to sell either the underlying assets or the SPV company owning the assets) and potentially to mitigate UK transfer tax on disposals of property; and

Minimising tax on rental and other income, and eliminating tax on capital gains, at the level of the property owning SPV companies.

In order to mitigate tax exposure on the purchase and sale of UK commercial property, it is usual for overseas investors acquiring commercial property in the UK to hold properties through non UK resident special purpose vehicles (“SPVs”). The SPVs will generally each own a single property and are typically companies incorporated in Luxembourg, the Netherlands, Jersey, Guernsey or the British Virgin Islands. The SPV will be structured with the intention of:

Tax efficient ownership of UK property


Residency

The structure depends upon the SPV being non-UK resident for tax purposes. In this regard, it is not sufficient that the SPV is incorporated outside the UK; it must also be centrally managed and controlled outside the UK.

As a general principle, central management and control of the SPV is exercised where the highest level of control of its business is found, that is where fundamental policy decisions are made about the company and its business.

The normal assumption is that central management and control is where the directors meet, but HMRC can have regard to all the facts and circumstances and if they consider that the decision making process is not carried out through meetings of the directors outside the UK, then the companies could be treated as centrally managed and controlled where the decisions actually are made.

VAT

Each SPV will usually be separately registered for VAT. This means that the compliance history of each SPV is ring fenced and the ability to recover VAT is determined solely by the circumstances of the particular property.

Selling UK real estateTaxation of gains

Provided that the SPV is not UK resident and holds the property as an investment, it will not be subject to tax on chargeable gains on a disposal of the property and so there would be no UK tax leakage on a disposal.

How to buy UK real estatePreferred corporate structure

Overseas investors usually acquire UK commercial real estate by either purchasing non-UK resident corporate SPVs or acquiring the assets directly into non-UK resident corporate SPVs.

Stamp Duty Land Tax

On acquiring shares in a non resident SPV, under current law no SDLT or stamp duty reserve tax should be payable.

Similarly if a sale takes the form of a disposal of the shares in an SPV, then no SDLT will be payable by the purchaser. Consequently this may allow a better price to be obtained on a disposal.

Holding UK real estateTaxation of income

Although a non-resident SPV would be subject to UK tax on the net rental profits (currently at 20%), this tax liability can often be substantially mitigated or removed through gearing, depreciation and other deductions (including management fees).

Capital allowances

The position with capital allowances is not altered by the SPV structure; however, capital allowances are only available to the corporate SPV and cannot be passed through to investors.

UK tax treatment of real estate preferred structures

“A terrific, highly diligent practice.”– Chambers UK


£250,001 – £500,000 (all property)

3%

£500,001+ (all property)

4%

In addition for residential properties (but not commercial properties) the below rates apply:

£1,000,001+ 5%

£2,000,001+ 7%

Residential properties over £2,000,000 purchased by a corporate entity for non investment purposes are subject to SDLT at 15%.

Income tax on rent

A non-resident will normally be subject to UK income tax (rather than UK corporation tax) on the net rents that it receives from UK property. It will be entitled to deduct any interest that it pays on monies borrowed wholly and exclusively for a letting business (for example, buying a UK property to rent out). However, relief for interest will not be available in respect of interest that is payable at more than a reasonable commercial rate or is in respect of a loan with an associated person to the extent the loan is not on arm’s length terms.

There are a number of taxes that affect the ownership of UK commercial property.Stamp Duty Land Tax (SDLT) on acquisition of UK property

SDLT is a transfer tax on land transactions of UK property. It generally applies wherever and however the transaction is executed and regardless of whether any party to the transaction is present or resident in the UK. Therefore all land transactions are subject to SDLT unless they are exempt (for example via the purchase of shares or units in a vehicle owning a property).

Stamp Duty Land Tax is payable by the buyer and is charged as a percentage of the total purchase price. This is shown in the table below:

Purchase price Stamp duty percentage

Residential: Up to £125,000 AND Non-residential/mixed use: Up to £150,000

0%

Residential: £125,001 – £250,000 AND Non-residential /mixed use: £150,001 – £250,000

1%

UK commercial property: tax system


It should be noted that it may be possible for a landowner making a supply of property to “opt to tax” the property, the effect of which will be to turn what would have been an exempt supply into a taxable standard-rated supply. The benefit of opting to tax is that the landowner is then able to recover any “input tax” which it has incurred in relation to the property, such as the VAT on his legal costs relating to the property and the VAT charged in respect of any renovation or improvement costs etc.

Finally, where property is transferred as part of a property rental business, there may be no VAT chargeable where the transfer is in the form of a transfer of a going concern (“TOGC”) subject to the satisfaction of certain conditions. Where the transfer is a TOGC, no VAT will be chargeable and this is the normal method of transferring let property to ensure that VAT is not payable by the purchaser on the purchase price.

Capital Gains Tax on sale

UK companies pay corporation tax on capital gains at up to 23% on any capital gain which arises from the transfer of real estate held as an investment.

Where the proceeds are treated as capital and the seller is not a tax resident in the UK and does not have a UK permanent establishment, there will be no tax to pay in respect of any gain that is realised from the sale of commercial property. However, tax may be payable in the jurisdiction in which the seller is resident, subject of course to the availability of any reliefs.

A non-resident borrower will need to ensure that it is not required to withhold UK tax from interest paid by it (as this will, normally, have the consequence of increasing the overall cost of borrowing). It may be required to do so if the interest has a UK source, even if the interest is paid to a non-resident lender. However, provided the borrower and lender are resident outside the UK and the loan is subject to the law of an overseas jurisdiction, the borrower should not be required to withhold tax even if the loan is secured on UK property.

Capital allowances

A qualifying investor may be able to obtain tax relief for a significant part of the purchase price through claiming capital allowances.

Under UK tax rules, any expenditure on capital assets is not deductible against trading income. However, relief is available in the form of capital allowances which are the tax equivalent of depreciation. Where capital allowances are available, a proportion of the cost of the asset can be deducted each year as an expense in the calculation of income profits. The rate of the allowances varies according to the nature of the asset. For example, the standard writing down allowance for plant and machinery is 18% a year but a reduced rate of 8% applies to other assets such as integral features (broadly, electrical, cold water and heating systems and lifts).

VAT

UK VAT is a tax on supplies of goods and services made by a “taxable person” in the course of a business. A taxable person can be any individual, a partnership, a company or other legal entity that has made vatable supplies over the past 12 months exceeding the registration limit (currently £79,000).

The standard rate of VAT is currently levied at 20%.

The purchase of a UK property (including the grant, assignment or surrender of an interest in, right over or licence to occupy land), is generally exempt from VAT (ie no VAT is charged).

However, there are a number of exceptions that are either standard-rated (ie currently 20%) or zero rated (ie VAT is charged at 0%).



Penny FrancisPartnerT: +44 20 7759 6508E: [email protected]

Richard MilesPartnerT: +44 20 7759 6588E: [email protected]

Elliot WestonPartnerT: +44 20 7759 6722E: [email protected]

Mark MallonPartnerT: +44 20 7759 6461E: [email protected]

Dan GwilliamPartnerT: +44 20 7759 6659E: [email protected]

Julian Innes-TaylorPartnerT: +44 20 7759 6412E: [email protected]

Contacts

“Clients are ‘very satisfied and very impressed with their services, and particularly the efficiency and clarity of their advice.’”

– Chambers UK

Lawrence Graham LLP4 More London Riverside London SE1 2AUT: +44 20 7379 0000 F: +44 20 7379 6854

Lawrence Graham LLPUnit 2, Level 6 Currency House Office Building 1 The Gate District Dubai International Financial Centre PO Box 506503 Dubai, United Arab EmiratesT: +971 4 437 5100 F: +971 4 437 5101

Lawrence GrahamPanorama Bloc C/D, 57 rue Grimaldi MC 98000 MonacoT: +377 93 10 55 10 F: +377 93 10 55 11

Lawrence Graham (CIS) LLP36th Floor Zapad Federation Tower Moscow, 123317 RussiaT: +7 495 799 5501 F: +7 495 799 5502

Lawrence Graham LLP133 Cecil Street #17-02 Keck Seng Tower Singapore 069535T: +65 6521 3555 F: +65 6521 3560

India deskSunil KakkadT: +44 20 7759 6584 E: [email protected]

[email protected] www.lg-legal.com

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Investing in the Uk Property part4