Profits from trading in and developing UK land
– a BPF response
Introduction
1.
The BPF represents the commercial real estate sector – an industry with a market value of £1,662bn which
contributed more than £94bn to the economy in 2014. We promote the interests of those with a stake in
the UK built environment, and our membership comprises a broad range of owners, managers and
developers of real estate as well as those who support them. Their investments help drive the UK's
economic success, provide essential infrastructure, and create great places where people can live, work and
relax.
2.
We welcome the opportunity to comment on HMRC’s technical note on the taxation of profits from trading
in UK land. Our main points are set out below, while Appendix 1 provides more detailed comments on
individual consultation questions. Appendix 2 illustrates a typical real estate fund structure and Appendix 3
illustrates a co-investment structure that could conceivably be affected by the new rules despite clearly not
being an intended target.
General comments
3.
Real estate investment is critical for any economy. Such investment provides high quality accommodation in
which businesses – from retailers to manufacturers, leisure centres to hospitals – can carry out their
activities and allows them the flexibility to adapt and relocate as business and economic conditions change.
It provides the homes that we need in order to rectify the UK’s acute shortage of housing and also acts as a
spur for further infrastructure investment.
4.
Real estate development is perhaps the property industry’s most visible and economically significant
contribution. Most of the more than one million people employed by the industry are engaged in some sort
of construction or development activity and much of this is funded by overseas capital. Any changes to the
way that this activity is taxed therefore merit careful consideration.
5.
We recognise that certain businesses have made use of aggressive tax planning structures in a real estate
development context and are supportive of HMRC’s efforts to clamp down on them. However, we are
concerned that the proposals set out in the technical note – in particular the anti-enveloping provisions – go
further than is necessary to achieve this outcome and could potentially affect ‘innocent’ commercial
arrangements.
Key points
6.
While discussions with HMRC have somewhat allayed these concerns, we would still make the following
recommendations:
6.1. New legislation and accompanying guidance should make it clear that the changes apply only where an
in substance ‘trading’ activity is being carried out. The new rules are not designed to apply to genuine
‘investment’ activities and the new legislation should not apply in such circumstances. However, the
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
‘gateway’ conditions for the anti-enveloping provisions could – unless suitably caveated – apply to
almost any disposal of UK property, regardless of whether it is trading or investment in nature.
6.2. HMRC should clarify in guidance that the new rules do not seek to change the distinction between
trading and investment activity in a real estate context. While this is often a difficult and somewhat
subjective area of the tax rules it is one in which case law has long provided a measure of clarity. To the
extent that this position is felt to be unsatisfactory we would expect any changes to be fully and
thoroughly consulted on rather than being introduced ‘through the back door’ by ostensibly closely
targeted legislation.
6.3. Introduce targeted anti-avoidance rules to deal with enveloping. We are particularly concerned that
proposals to drop the requirement that control is disposed of (paragraph 50 of the technical note)
could be problematic for many bona fide real estate investors and cause widespread uncertainty. We
would favour rules that more closely address trading scenarios and propose a new targeted rule.
6.4. Overseas traders should not be left in a worse position than their UK equivalents as a result of the
new rules. This could arise in particular where the trader has suffered an impairment to the value of
their asset prior to being brought into the scope of UK tax but also where expenses have been incurred
that are not incorporated into the carrying value of the property (e.g. corporate administration
expenses, audit fees, certain types of interest expense).
6.5. The Diverted Profits Tax (DPT) rules should no longer apply to real estate projects. The proposals set
out in the technical note should ensure that all profits from trading in UK land are subject to UK tax. If
the DPT rules are not amended to exclude real estate projects then a risk of double tax arises.
6.6. Clarify how profits will be computed for the purposes of the new tax charge. Calculating the deemed
trading profits of an entity or a particular investor may be tricky where either no accounts are prepared
or they are prepared under non-UK GAAP/IFRS. It is also not clear on what basis the profits of the
deemed UK property trade should be split out from other profits of the affected taxpayer.
7.
We would welcome the opportunity to discuss any aspect of our response in more detail. Please do not
hesitate to get in touch if you require further information. We would also be delighted to review draft
legislation on a confidential basis if that would be helpful in order to help identify any potential difficulties.
Far better that these are spotted before the new rules are made law than have to correct them
subsequently.
Ion Fletcher
Director of Policy (Finance)
British Property Federation
St Albans House
57-59 Haymarket
London SW1Y 4QX
020 7802 0107
[email protected]
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
Appendix 1 – detailed responses to consultation questions
HMRC would welcome comments on the approach outlined above and whether there are any alternative ways
in which this anti-fragmentation rule should be expressed
8.
We understand from HMRC that the aim of these rules is to treat as a single trade ‘bundles’ of activity that
might reasonably be considered as such but just happen to be spread among different legal entities. In
other words, the rules should identify and capture activities that add significant value to a particular project.
9.
The extent of the ‘bundles’ – and therefore how widely the rules will apply in any given project – will
depend on the facts of each case. But again we understand that HMRC would not normally regard payments
as being ‘relevant amounts’ as long as they are ‘commercial’ payments made on arm’s length terms in
exchange for ‘routine’ goods and services as opposed to some form of profit sharing or participation
mechanism. For instance, we would not normally expect payments to a sales/estate agent to be subject to
the new rules, even where this remuneration is based on the value of sales proceeds.
10. As long as payments are not profit sharing mechanisms, we see no reason why they should be treated
differently depending on whether they are made to a third party or to a group company. It is not clear that
HMRC is suggesting that there should be a distinction, but paragraph 28 of the technical note refers to
“services of a type which are also charged on a standard basis to third party customers”, which leaves room
for ambiguity.
11. Overall, however, this seems like a reasonable approach to us; if the government has decided that all profits
from UK land should be subject to tax then one needs to identify what is profit and what is not. However, it
is unclear how successful legislation can be in distinguishing between bona fide commercial payments and
profit participation.
HMRC would welcome comments on whether this test of economic connection could have any unintended
consequences
12. We are concerned that the proposed 25% thresholds are too low for the purposes of establishing economic
connection (we would favour a >50% threshold, which is more closely linked with existing concepts of
control) and could result in some entities suffering tax on the profits of other practically unrelated entities
over which they have very little influence or control. While in future contractual arrangements may allow
for the recouping of such tax charges, existing contracts will most likely not, meaning that innocent entities
may suffer unwarranted tax charges.
13. Accordingly, it would be helpful if the legislation were to provide some sort of mechanism for those who
find themselves in such situations to recover from other parties any tax that should have been borne by that
other party. Section 829 CTA 2010 and section 768 of ITA 2007 could provide a template for such a recovery
mechanism.
HMRC would welcome comments on the scope of this aggregation rule, how it should be framed and whether
any amounts should be excluded.
14. As noted in paragraph 12 above, we consider that the scope of the aggregation rule is potentially too broad
and could result in parties that are in substance unconnected being treated as if they were acting as one
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
and taxed on that basis. We would therefore recommend that the threshold for economic connection be
increased to >50%.
HMRC would welcome comments on the proposals on enveloping, including the possible differences from the
provisions in the transactions in land rules
Trading vs. investment
15. The proposed anti-enveloping rules need to be framed very carefully if they are not to apply to activity that
is investment for tax purposes. Our main concern is how they may operate in a real estate funds context.
16. Given its bulky and illiquid nature, it is common for investors, even major institutional investors, to gain
exposure through collective investment vehicles and joint venture arrangements (for simplicity and the
purposes of this response, we refer to such arrangements as real estate funds, although in reality they
display diverse structural and regulatory characteristics). Real estate funds spread commercial risk among
participants and give investors access to opportunities and expertise they would not have on their own.
17. Real estate funds generally have set investment objectives or strategies that guide their commercial
operations. These may be very tightly defined (as in the case of a joint venture investing in a single asset) or
may provide significant discretion and flexibility, as is enjoyed by more diversified funds. The investment
objective will also influence the extent to which a fund targets income or capital growth opportunities and
the length of time for which it holds its assets before selling them.
18. However, almost all UK real estate assets – or the entity that owns the assets, which in many cases is an
overseas company channelling overseas capital into the UK through a real estate fund – get sold eventually.
The importance of capital returns in a real estate context is evidenced by the fact that the IPD index, which
tracks real estate performance, separately presents income and capital return information. Accordingly, it
would be very unusual for any property investor to acquire a property without an intention of making a gain
on its ultimate disposal.
19. As a result, we are worried that the proposed anti-enveloping rules – which look to whether there existed
an object of realising a profit from the disposal of a property – could in theory apply in almost any situation
where land is sold at a profit.
20. While HMRC have indicated that the anti-enveloping rules should apply only where there is in substance an
activity that is trading for tax purposes, the way in which the technical note describes the gateway
conditions (particularly conditions 1, 2 and 4) does not make any distinction between trading and
investment. That distinction – or one like it – may be implicit in the transactions in land rules (upon which
the anti-enveloping provisions are based), but it is by no means clear from a straightforward reading of the
gateway conditions as proposed. The uncertainty is exacerbated by the proposals that the new rules apply
even where there is no tax avoidance motive.
21. Unless the legislation implementing these rules (or the guidance that supports it) is appropriately targeted,
the investment activities of real estate funds could be caught by them, an outcome at odds with HMRC’s
policy objective. It is also an outcome that would give rise to significant uncertainty for investors in real
estate funds, which own well over a quarter of the amount invested in UK commercial real estate1.
1
Property Industry Alliance Property Data Report 2015
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
22. Accordingly, we would strongly recommend that the implementing legislation makes clear that the antienveloping rules only apply where it is reasonable to assume that in substance a UK trade in land is taking
place.
Change to meaning of disposal - transfer of control
23. From conversations with officials we understand that the behaviour HMRC finds offensive involves
arrangements featuring parties disposing of their interests in a de facto trading property by selling shares in
a company that owns that property.
24. We are of the view that the existing transaction in land rules would already bring many such arrangements
into the charge to tax. For instance, imagine that four parties put capital into a land development project
owned by a special purpose vehicle (SPV) in return for each receiving 25% of the shares in that SPV. Once
the land has been developed those shares are sold to an unconnected buyer (the ultimate owner).
25. Applying section 816 of CTA 2010 we would conclude that control over the ‘property deriving its value from
the land’ (the totality of shares in the SPV) has been ‘effectively disposed of’ through the medium of ‘one or
more transactions’ or even in connection with ‘any arrangement or scheme’. The sale of the SPV shares
should therefore already be subject to the transactions in land rules. The technical note acknowledges in
paragraph 39 that the transaction in land rules are likely to apply in a wider range of instances in future,
such as the one described above.
26. However, we recognise that even ‘newly empowered’ transactions in land rules are likely to be insufficient
to catch all abusive arrangements and that new anti-enveloping rules are probably required. But we are
very concerned that removing the requirement for control to be disposed of could be problematic in many
cases for bona fide real estate investors – ranging from individuals with spare cash to invest to large pension
funds – that are not the intended target of these measures.
27. Many real estate investors undertake development projects with an intention to hold the property once
fully developed. These projects are generally owned by SPVs as this structure gives the investor the option
of one day selling the property, selling the SPV or selling part of SPV depending on the preferences of any
potential future buyers.
28. As mentioned above, real estate investment often takes place through joint venture arrangements and
what can often happen is that once a development asset has been completed an outside investor takes an
interest in that asset. This may suit both parties, as the original investor gets to release some of the capital
tied up in the newly-developed asset for use elsewhere and the new investor gets exposure to a brand new
(or refurbished) asset that more closely fits their risk profile than would a development asset. An example
of such a co-investment structure is set out at Appendix 3.
29. The intention of both parties is often to hold for the long term and where this is the case the property will
be treated as investment for tax purposes. However, if there is no requirement for control to have been
disposed of in order for the proposed anti-enveloping rules to apply, the original investor will need to
consider whether selling down their interest meets the gateway conditions. This adds uncertainty to joint
venture arrangements and could mean the new rules apply far beyond their intended target.
30. Another situation where removing the requirement for control to have been disposed of could cause
problems is where a minority investor in an SPV that owns a real estate project sells their interest in that
SPV. At that point they would need to consider whether the SPV had acquired the property with the sole or
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
main object of realising a profit from disposing of the land in connection with a de facto trade. This could be
extremely difficult to ascertain if the SPV has not yet disposed of the property. In addition, how could the
minority investor prove what intention the SPV might have, given that they would have very little influence
over the SPV and may not be able to obtain relevant evidence?
31. An extreme example of the above could be where a ‘man on the street’ or retail investor places some spare
cash in listed property company shares. Unless that company is a REIT, there is effectively no guarantee of
an income return to that investor. If no, or little, income is expected, the investor is clearly looking for
capital growth to occur in order to make the investment worthwhile. In other words, they are arguably
investing with the ‘sole or main object of realising a profit from…disposing’ of ‘property deriving its value
from UK land’. As such, any gains are potentially subject to income tax under the new rules.
32. We understand that such investors are very much not the target of these measures and that in any case
particular rules may apply in the context of investments in listed company shares. However, the example is
illustrative of the problems with removing the requirement for control to be disposed of and just how
widely new rules may apply if there is no control test.
33. While HMRC guidance could help to clarify situations that are ‘innocent’ under the rules, such an approach
feels almost concessionary, with the shortcomings of the legislation (that it is broader than it needs be)
being effectively corrected through guidance. Better by far for the legislation to go no further than it really
needs to.
An alternative – targeted rule
34. We believe it is possible for new anti-enveloping rules to target the abusive behaviour that HMRC is seeking
to clamp down on without giving rise to the uncertainty we describe above.
35. These rules could still be modelled on the transactions in land rules but the general principle would be that
the rules apply only where control has been disposed of. In other words, the second change to the meaning
of disposal as proposed by the technical note is not made.
36. However, a new targeted rule would provide that the disposal of a non-controlling interest in a property
owning company is caught if the seller, or a party connected with the seller, has provided development
services in relation to the project (other than financing).
37. Take the example of a de facto trading developer who participates in a project by way of a minority interest
and who seeks to realise their profit through the sale of shares in an SPV that owns the project. The new
rule would look to whether that developer (or other entities that they are associated with) had provided
any development services other than finance. Where this is the case, the disposal is treated as trading
income subject to corporation or income tax.
38. This rule could conceivably apply in more benign circumstances such as co-investment arrangements like
the ones described in paragraphs 26-28 above and in Appendix 3. However, in those cases we would expect
that the retention of a significant interest in a property SPV would indicate that the ‘sole or main object’
test in the gateway conditions is not met and the anti-enveloping rules do not therefore apply.
39. Examples in HMRC’s guidance could expand on when the targeted rule may or may not apply and we would
be happy to assist with those examples if that would be helpful.
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
Overseas traders in a worse position than their UK equivalents
40. There are certain instances in which the new rules could result in an overseas trader in UK land being left in
a worse position than their UK equivalents, in the sense that they would not receive tax relief for certain
items of expenditure that would ordinarily be tax deductible.
41. These items are broadly divided into two categories:
41.1.
Costs affecting the value of the real estate asset, such as impairments occurring before the
property is sold and the disposing entity is brought into the charge to UK tax. Failure to take such
impairments into account could effectively result in taxable profits in excess of economic profits.
41.2.
Costs that are not capitalised into the carrying value of the real estate asset, such as audit fees,
property marketing costs and interest paid on debt not directly related to the property. Again, failure to
obtain tax relief on these costs results in taxable profits in excess of economic profits.
42. We appreciate that HMRC does not wish the targets of the new rules to benefit from a base cost ‘step up’ at
the point at which they come into the charge to UK tax. However, in the interests of fairness we would
encourage HMRC to grant tax relief for the kind of expenses set out above. Similarly, we believe group relief
should in principle be available (subject to the upcoming consultation on loss relief) for losses of UK
members of the same group (or other offshore companies within the charge to CT) if an offshore company
comes within the scope of the CT charge.
Interaction with Diverted Profits Tax (DPT)
43. It is unclear how the new rules will interact with the ‘avoided PE’ provision in section 86 of FA2015 (Diverted
Profits Tax). It seems to us that if all profits from trading in UK land are to be subject to UK tax then DPT
need not apply at all to real estate transactions and for the purposes of simplicity section 86 could be
amended to disapply DPT in these circumstances.
Computation of trading profits
44. It is not entirely clear how the profits of the deemed UK property trade are to be calculated in certain
circumstances, particularly where there is a sale of shares in a property SPV. Accounts may be prepared
using non-UK or non-IFRS GAAP, making calculation of UK tax under normal principles more difficult.
45. Even where accounts exist, the property asset may be carried as an investment asset at fair value rather
than being valued at the lower of cost and net realisable value as would be the case if it were held as
trading stock.
46. We would welcome guidance that deals with some of these questions once the new legislation has been
developed.
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
Appendix 2 – example real estate fund structure and investment strategy
The diagram below illustrates a typical real estate fund structure, although every fund will reflect the
commercial requirements of its investors. The fund in the example below invests across jurisdictions, but many
real estate funds invest only in UK real estate.
Investors (LPs)
(Diverse range of investors from
multiple jurisdictions)
Fund
manager /
advisor
Investors
Investors invest via a fund to pool resources and achieve
economies of scale, to spread risk and to access
professional investment and portfolio management
services.
General
partner
Fund vehicle
This vehicle is usually a tax transparent entity. Investors
like to invest in a transparent vehicle to ensure that they
are taxed according to their individual tax attributes.
Where the fund is structured as a limited partnership the
general partner is legally responsible for management, but
the general partner or the limited partnership may engage
an external manager or advisor to assist.
Fund
vehicle
(ELP)
Holding Company
A holding company is often used in order to consolidate
the underlying real estate investments. The administration
and financing of the property portfolio may also be carried
out by the holding company. Alternatively, a fund may
have a separate holding company for each investment.
It is not uncommon for a local holding company to be used
in the same jurisdiction as the investment, as illustrated
with the investment in Country A.
Holding Company
Local
holdco
SPV
SPV
SPV
Country B
Country C
Country D
SPV
SPVs and investments
Individual real estate assets are often directly owned by a
special purpose vehicle or holding company, often (but not
always) in the same country that the asset is located. This
allows flexibility when selling the asset e.g. the ability to
sell a proportion of the asset, rather than the whole asset,
by selling some of the shares in the property-owning
company. It also allows for specific borrowing at the level
of the asset if required and ‘insulates’ assets from each
other by containing losses within individual investments.
Country A
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Profits from trading in and developing UK land
– a BPF response
Investors in real estate funds
1.
Investors in real estate funds comprise institutional investors such as UK and overseas pension funds; life
and insurance companies, endowments and charities; other overseas investors such as sovereign wealth
funds; UK and overseas listed property companies and sophisticated private investors. A large proportion of
investment in real estate funds is undertaken by institutional and local government pension funds and, as
such, the public at large is invested in real estate funds through their savings, insurance products, and
pensions.
2.
Property, in one form or another, accounts for around 6% of the £3 trillion invested by UK institutions
(insurance companies and pension funds), of which investment in collective investment schemes is around
one third of the 6%.2
Role of real estate funds in the UK economy
3.
The real estate fund industry contributes to the UK economy in many ways, not least by providing a channel
for overseas institutional investors to invest in building and improving the UK’s commercial and residential
real estate. Real estate funds also provide support to government programmes such as the ‘Northern
Powerhouse’ which encourage private investment in better infrastructure and property to improve quality
of life and attract businesses and people to regeneration areas.
4.
Investors in real estate funds provide finance for the construction, redevelopment or refurbishment of
buildings, which provide modern space for businesses and new homes for families, improve the public
realm and infrastructure (through contributions to Crossrail / Community Infrastructure Levy etc) and
positively contribute to the UK’s GDP.
5.
The real estate funds which undertake these activities assume a level of development risk appropriate for
their investors with the intention of providing high quality stabilised assets for core institutional investors,
such as pension funds or insurance companies, who seek assets with stable returns to match against their
liabilities. Property funds also provide diversification opportunities and facilitate property investment in an
illiquid asset class (i.e. without requiring investors to buy actual buildings). They provide access to property
expertise from specialists which results in better quality, sustainable assets.
Real estate funds investment strategy
6.
A real estate fund’s documentation will set out the investment strategy of the real estate fund. Typically, a
fund will have certain restrictions which are agreed at the outset with investors. Examples of such
restrictions can include a maximum level of gearing for the fund’s investments; a limit on the amount of
equity that can be deployed into development or major refurbishment projects and diversification
provisions to limit the proportion of investors’ equity which can be committed to an individual investment
or asset class or geography.
7.
Real estate funds may be ‘closed-ended’ – often with a fixed life of 8 – 10 years- or ‘open-ended’ with an
indefinite lifespan. In a closed-ended fund, the investment period of the fund, being the period during which
new investments can be acquired and commitments ring-fenced, is typically 3 – 5 years. In line with all
property investment, the returns to investors will comprise an income return and a capital return. Target
2
Property Industry Alliance Property Data Report 2015
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
IRR returns of a fund will range from c. 7% to c. 20% depending on whether the fund is ‘core’, ‘core-plus’
‘value-add’ or ‘opportunity’.
8.
Direct investments of a real estate fund will, either initially or after undertaking asset management
initiatives, generally comprise income-producing assets with long-term leases to good quality tenants
providing a stabilised rental yield. Property assets might be acquired with tenants in situ on leases set for
expiry in the short to medium term. At lease expiry, the tenant may extend their lease or the opportunity
may be taken to improve the building to attract new tenants on an improved rental. Real estate funds may
also acquire disused buildings or land on which to develop commercial or residential property with the aim
of letting up and stabilising the asset prior to exit. Some funds may also invest in asset-backed operating
businesses such as hospitals, pubs and hotels. Real estate funds may also acquire a site with the aim of
developing and selling residential dwellings.
Tax treatment of property funds
9.
Real estate funds come in different legal forms and are based in different jurisdictions but essentially seek
to minimise frictional tax in the fund structure so that their investors are taxed in the same way as if they
made a direct investment in property.
10. When an SPV acquires an asset, the directors of that entity will decide upon a business plan, and in
particular whether the property is being acquired with the intention of long-term capital growth and rental
income, or with the intention of developing or dealing in the land to make a profit.
11. From the fund’s perspective, the intended hold period will be determined by calculating when the return to
the funds’ investors is expected to be maximised, whilst taking into account the fund’s remaining life (if
closed ended). Many property funds will seek to hold an interest in their assets for between three and five
years but there will be instances where investments are held for shorter or longer periods depending on the
fund’s investment aims and whether the business plan is realised earlier or later than anticipated.
12. In some cases it will be clear that the entity business plan is in the nature of a trading venture (e.g.
development of residential apartments to be sold to occupiers on completion) and the tax treatment of the
entity and the fund, in the case of a disposal of the entity, is clear.
13. In other cases, it will be clear that the entity business plan is in the nature of an investment as the fund may
be acquiring a rental yielding asset with the intention of enhancing capital values through improving the
tenant mix and rental yield as lease events arise.
14. However, in some cases, the position will not be clear cut. The acquiring entity will often have the intention
of holding the property for long-term rental income and capital growth as there will be no intention for that
entity to sell the asset. However, given the complexity of some development and refurbishment projects,
the time it can take to achieve vacant possession, obtain planning permission, undertake construction and
find tenants, and the length of rent-free periods that are provided as market standard tenant incentives
(which in some locations and sectors can commonly be up to 24 months), the fund may need to exit the
investment before the property is generating positive rental cash flows.
15. It is noted that on a sale of such an asset the capital proceeds that a buyer will be prepared to pay will not
be calculated on the basis of vacant possession or gross development proceeds, but will instead be
calculated based on the discounted value of the future rental income of the property i.e. it will be valued as
an investment asset.
WE HELP THE UK REAL ESTATE INDUSTRY GROW AND THRIVE
Profits from trading in and developing UK land
– a BPF response
Appendix 3 – example co-investment structure potentially affected by proposed antienveloping rules
The diagram below shows an investment structure used for ‘build to rent’ (BTR) investment, which involves
building new homes designed specifically for long term rental. Typically, investors come into a BTR investment
fund set up in the form of an ELP. This ELP will purchase land / buildings suitable to build / convert properties
for long term rental purposes. Each property is held within individual SPV in order to facilitate borrowing for
each asset and provides flexibility for eventual disposals.
The general partner of the BTR ELP1 sets up another fund (BTR ELP2) for investors that prefer to participate only
after the properties are built and stabilised by the BTR ELP1. BTR ELP2 will have the ability to buy up to a third
of the SPVs mentioned above.
Under the existing transaction in land rules, the investors of BTR ELP1 are not subject to such tax because the
neither control of the underlying properties or the SPV shares is transferred. Without the requirement for
control to be transferred (as proposed by the new the technical note), the situation is less clear and this
introduces a new element of tax uncertainty into such commercially and socially desirable arrangements.
Investors
Investors
GP
BTR
ELP1
BTR
ELP2
Right to acquire 33% of the
SPVs
SPV1
SPV2
SPV3
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