Welcome to the Spring Edition.

The government's proposals for a UK-REIT have taken a bit of a clobberingrecently with many existing propertycompanies thought unable to convert.The 10% shareholding restriction, aconsequence of tax treaties, is notmovable but the BPF, IPF and RICS, whohave made a joint submission, arehopeful of securing some exceptions.The gearing limit of 40%, designed toencourage more equity involvement, isseen as too rigid but the plea that themarket should be allowed to define asuitable level will presumably notsucceed. The conversion charge willnot be known until the budget andnow there may be penalties on the saleof development properties within threeyears of completion. Given theeconomic benefits of these kinds ofvehicles, hopefully government and theindustry will find a way to make the"unworkable" proposals work.

LAWYERS TO THE REALESTATE & CONSTRUCTIONINDUSTRY

www.klng.com

Spring 2006

Overriding Interest

Pros and Cons of LLP vCompany as investment vehicleIf 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:

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.

Contents

Pros and Cons of LLP v Company 1as investment vehicle

Legal developments 2

Spring deals 3

Legal cases 4

Who to contact 4

� 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. non-

business 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 part-

time), 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.

continued on page two

Overriding Interest

2 SPRING 2006

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.

� 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.

LegaldevelopmentsIndirect Tax

� Stamp duty on acquisitions of UK

property - companies and LLPs

both subject to stamp duty land tax

at 4% on acquisitions above £500k.

� 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.

� HMRC takes the view that an LLP

cannot be the parent of a group of

companies for SDLT (and stamp

duty) group relief purposes.

continued from page one

� 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 -v-

Cadogan 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.

www.klng.com

SPRING 2006 3

Springdeals

� 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- of-

the-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.

� 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.

� 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.

Overriding Interest

4 SPRING 2006

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 9001Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle marketcompanies, capital markets participants, and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally.

K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware,U.S.A. and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco andWashington and one incorporated in England practicing from the London office.

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used orrelied upon in regard to any particular facts or circumstances without first consulting a lawyer.

Data Protection Act 1998 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and withour regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if youwould prefer not to receive this information.

© 2006 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.

Legal cases RectificationA 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.

Comment: As the clause stood, it was a

commercial nonsense and could not

have been intended.

Littman -v- Aspen Oil, CA

DamagesWhere 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.

Comment: The damages awarded were

doubled by this method of assessment.

Horsford -v- Bird, PC

RepairsAn 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: The Court made clear that

its decision turned on the specific facts

of the case.

Delgable -v- Perinpanathan, CA

RepairsA 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.

Comment: A further case of

insufficiently clear drafting causing

problems of interpretation.

Marlborough Park Services -v- Rowe,

ChD

Restrictive CovenantsA 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 long-

term one.

Comment: Potential temporary

disturbance from the construction work

was disregarded.

Shephard -v- Turner, CA

Rights of AccessWhere 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.

Europa 2000 -v- Keles, CA