Property is a highly rewarding avenue for investment, but the sector also brings its own unique risks and challenges. When setting up your property investment company, it’s important to make the most of the structural options available to mitigate these challenges.
What are the key factors to consider?
The nature of property development contains some risk, including:
• Diversification challenges: Property investment is hard to diversify, given the high value of the individual assets.
• Funding risk: Given the large amounts of capital involved, many property investments will rely on external lending.
• Third party risk: Property development projects are multi-stakeholder projects, and take on the risk of these partners. If they fail to deliver or go under, the project itself can be at risk.
• Commercial risk: The conditions that determine value can change dramatically over course of the project, including market conditions, interest rates or economic environment.
For these reasons, it is common for a property investment business to involve multiple companies, using a holding business to manage a range of sister companies, often a Special Purpose Vehicle (SPV), that owns individual projects, isolating risk within a particular structure.
Tailoring your structure to your goals
It’s essential to consider your own objectives when setting up the business to ensure your structure supports your goals.
Income and investment
One of the most common reasons to invest in property is to generate a passive income, for example as a savings vehicle or a pension supply. In contrast, some choose to develop property as an investment, building a portfolio over time to generate revenue to invest in new projects. If you are aiming to:
1 Extract income - this should be reflected in your share structure. If there are other stakeholders involved in your business, you may also need to use an additional level, e.g. a Family Investment Company, to control the dividend policy for different stakeholders and their needs.
2 Invest - profits and revenue should be kept in the business. Your structure should then focus on being as tax efficient as possible to maximise profit retention for future projects.
Passing on wealth
Property investment is a long-term business, with property generally holding value over long periods. This can make it an ideal method for passing on wealth. However, the recipient can be liable for Inheritance Tax (IHT), the standard rate for which is 40% once over the allowable threshold.
Using a family holding company to manage the portfolio can enable the business to pass on value through controlling shares in the company instead of the assets themselves.
Share classes can also be used to move value across generations, using growth, or freezer shares that are capped at a certain value level.
Tax management
The structure of your companies can help you allocate and offset income between corporate entities to manage your tax burden. Companies pay Corporation Tax rates of 19% (25% from April 2023) while the top rate for personal income tax is 45%. No Corporation Tax will be payable on dividends between entities in the company, unlike if they had been paid to the owner. In addition, expenses incurred between subsidiaries to the holding company are considered tax deductible.
The structure of your company is one of the most powerful tools available for business owners to reach their goals and manage risk.
Get in touch with us to find out how you can make your property structure work for you.
www.hwca.com/accountants-esher
T: 020 8549 5137
