This session provided an introduction to SPVs, looked at key tax considerations when purchasing property, overage and restrictive convenants, and a planning update.
3. Topics
• What is an SPV?
• Key differences between the acquisition of an SPV
and a property purchase
• The legal process of an SPV acquisition
• Buyer protections in an SPV situation
• Case study
• Summary of key points to remember
4. What is an SPV?
• Special purpose vehicle or a single purpose
vehicle
• Often used as property holding company
7. Summary of key differences
• The Buyer becomes a shareholder in the SPV
• The owner of the property is the SPV – this does
not change
• The Buyer is purchasing the SPV which includes
the property as an asset but also includes all
liabilities
9. Key tax considerations – property
purchase
Taxes payable on the purchase of the property
• SDLT
• Potential VAT
Other considerations
• New (and known) base cost
• Capital allowances on existing fixtures
• Potential mortgage interest relief restrictions
• Seller’s tax position
10. Key tax considerations - SPV
Taxes payable on the purchase of the shares in the SPV
• No SDLT
• No VAT
• Stamp duty
Other considerations
• Mortgage interest relief
• Capital allowance continuity
• Potential double taxation
• Tax history
• “Pregnant gain”
• ATED
11. Example tax differences on purchase –
Residential (£3m)
• Property purchase
– No VAT
– £273,750 - £363,750 SDLT (individual Buyer)
– Up to £450,000 SDLT (company Buyer)
• SPV
– UK-based SPV
– £15,000 stamp duty
– No SDLT or VAT
12. Example tax differences on purchase –
Commercial (£20m)
• Property purchase
– VAT charged
– £1,189,500 (SDLT)
– £4,000,000 (VAT)
• SPV
– UK-based SPV
– £100,000 (stamp duty)
– No SDLT or VAT
13. SPV – primary Buyer tax concerns
• “Pregnant gain”
– What if the SPV later sells the property?
– How big is the pregnant gain?
– Negotiate a reduction to the purchase price?
– Contractual protection from the Seller?
– Tax advice and early due diligence is essential
14. SPV – primary Buyer tax concerns
• Historic tax liabilities
– Corporation tax?
– VAT / PAYE / NIC / SDLT?
– ATED? High value residential property only
– Overseas tax position? Overseas companies only
– Contractual protection from the Seller is required
– Tax advice and early due diligence is essential
15. ATED charges
• Annual Tax on Enveloped Dwellings
• Applies to residential properties valued over £500,000
owned by a non-natural person (incl. SPV)
– Annual charge between £3,500 (lowest band) and £220,350 (highest
band)
– Charges are increased yearly (on 1 April)
• Reliefs are potentially available, but must be claimed
on a return
• Fixed penalties for failing to file returns
16. What is the legal process for a
share acquisition?
• Negotiate and agree heads of terms
• Due diligence
• Understanding the company and the Seller
• Preparing a due diligence report
• Draft and negotiate SPA
• Split exchange and completion not necessary.
17. Legal process
• Draft and negotiate all relevant ancillaries
• Negotiate the disclosure letter
• Mechanics of completion and completing
• Post completion matters such as paying stamp duty
and updating the company statutory books
• Liaising with overseas lawyers for input on
jurisdiction-specific aspects
19. SPV - SPA tax considerations
• Sale price
– Negotiate purchase price to take into account:
any pregnant gain (Buyer)
any tax savings for the Buyer (Seller)
• Tax Warranties and Tax Covenant
– Pregnant gain warranties/indemnity:
controversial
– Cover for historic tax liabilities:
how broad?
20. Case study (Guernsey)
• London property worth £20m
• SPV and Seller based in Guernsey
• Seller a shell company in Guernsey with the
ultimate owner an individual in Russia
• We were acting for the Buyer
21. Case study (Guernsey)
• We were engaged to act on the UK corporate and
property aspects
• We engaged Guernsey-based lawyers for specific
jurisdictional advice
• Big four accountancy firm engaged on financial
aspects
22. Case study (Guernsey)
• Significant due diligence (primarily property)
– We found some historic loan agreements that had to
be covered
• Guarantor – potential issues with enforceability
– Retention + W&I Insurance to cover risks
23. Case study (Guernsey)
• Significant tax savings
• “Base cost” warranty
– Aggregate incurred expenditure (acquisition, costs of
acquisition, capital expenditure etc.,)
– Big four accountancy firm “signed off” on the base cost on the
basis of the above warranty
• Overseas element
– No stamp duty payable on the stock transfer form (the stock
transfer form was not brought into the UK)
24. Summary
• Remember an SPV acquisition is a more complex
legal process – factor this into timetable
• Involve a corporate lawyer and financial and tax
advisers at an early stage to assist with structuring
• Check financing arrangements of the buyer early on
and requirements of any third party funders – do
they require security? What are the conditions
precedent?
25. Summary
• Understand who the seller is and the financial
standing of the person providing assurances about
the SPV
• Ensure the client is comfortable with the tax
structure and consequences early on
• Make sure the heads cover not just the property
basics but the SPV specifics
• If overseas companies – overseas lawyers to be
instructed
28. What is an Overage?
• Promise from a land buyer to make a further
payment to the seller when a trigger event happens
• Numerous ways of documenting – most common is a
positive contractual obligation protected by
restriction on title
• Methods of Calculating Overage:
– Increase in Market Value Post-Planning
– Sales Based Overage
29. When and how used?
• Agricultural or Bare Land Sale – no immediate
expectation of development
• Sale for development – sales based overage to
agree final purchase price and spread payments
• Public Sector Landowners – anti-embarrassment
protection
• Landed Estates – deter future development of
former estate land
30. When Buying Overage Land
• Does your purchase trigger payment?
– If so, ensure seller deals with it pre-completion and
provides release documents
• Does it continue to bind land post completion?
– Establish future payment triggers
• Is third party consent required?
– Delays to purchase
– Additional costs for getting consent / release
31. Getting details right
• Sparks v Biden – 2017 case
• Overage payable on sale of any newly built homes
• Minimum payment under formula was £700,000
• Biden constructed eight homes but then lived in
one and rented the others on ASTs
• Court implied an obligation on Biden to actually
proceed to sell homes otherwise agreement made
no sense
32. Key Considerations
• Overage Period and Percentage Payment
• Trigger Events
• Planning Permission and Development
• Implementation
• Disposals
• Deducting Costs from Enhanced Value
• Profit Calculation
• One trigger or multiple triggers?
33. Overage Period and Percentage
• Need client or agent to advise client on best terms
– there is no “standard” or default overage period
or percentage payment
• Will depend on what landowner is trying to protect
through the overage and what value given to the
land at date of sale as undeveloped land
34. Trigger Events
• When should further payment be made?
– Sale with Planning Permission
– Implementation of a Planning Permission
– Grant of Planning Permission? Usually no.
• Any sale for profit? Anti-embarrassment
• Plot Sales
• When dealing with SPVs: change of control of SPV
35. What is a Planning Permission?
• Permission for either a specific Development or
permission for anything other than a specific
Development?
• Outline? Detailed? Reserved matters?
• Consider permitted development rights – no application
needed for planning permission. Are these acceptable or
still require overage payment?
36. Relevant Development
• Specific type of development triggers overage or all
development except for a specific exclusion trigger overage?
• Be clear about types of development permitted / triggering
overage
• Reference to Use Class Order – as at time of overage or as
varied?
• “Residential Development”? See Harris v Berkeley Strategic
Land Ltd re: care homes as residential
37. Implementation
• S.56(2) Town and Country Planning Act 1990: “Development
shall be taken to be begun on the earliest date on which any
material operation comprised in the development begins to
be carried out.”
• Pre-commencement planning conditions as triggers?
• Exclusion of preparatory works? e.g. demolition and site
surveys?
• Phased implementation of large developments – single
trigger for payment or staged payments?
38. Disposals
• Sale / Transfer – obvious one – of land or plots
• Grant of Lease? Consider long leases and short term
leases for a commercial rent
• Permitted “disposals”:
– Easements
– Substations / highways / infrastructure
– Mortgages / Charges
– Affordable Housing – Burrows Investments v Ward Homes
• Disposal of individual plots to end users?
39. Deducting Costs from Valuation
• Will need to determine market value and enhanced
value for most overage calculations
• Deduct costs of obtaining planning permission:
– Professional Fees
– Planning Fees
• Construction Costs?
• Caps on costs deductions – reasonable costs or fixed
cap?
40. One Trigger or Multiple Triggers?
• Can have big impact on purchase price offered
• One Trigger better for buyer – overage disappears
after first Trigger
• Multiple Trigger better for seller – overage catches
every Trigger during overage period
• One Trigger – risk of a ‘soft planning permission’ to
secure release for low payment
42. Restrictive Covenant
• A promise
• That binds land
• To restrict to use of that land in a particular way
43. Is it Valid?
• Does the covenant benefit another person’s land?
• Is the benefitting land identifiable?
• Has the land been subdivided? (If so, will the
covenant bind the last plot to be sold off?)
• Was any land retained?
• Any common ownership of burdened and
benefitting land?
44. Positive or negative?
• To erect and thereafter maintain a boundary wall
between the points marked A to B
• Not to let the boundary fence fall into disrepair
• Not to use the premises for anything save as an
ambulance station
45. Positive or negative?
• A true restrictive covenant will bind the land to which
it relates (provided it is valid and enforceable)
• A positive covenant does not bind the land - will only
be enforceable by a chain of indemnity or direct
covenants given to intended beneficiary
46. Enforceability - When was it
created?
• Pre 1926? Was it referred to in a title document?
• Post 1926? Is the land registered?
– If unregistered, was it registered as a Class D(ii) Land
charge?
– If registered, is it protected by a notice on the title
register?
47. Next steps - Options
Express release
• Pros
– The land is definitely released, and the covenant no
longer binds
– The release should be registered, and the covenant
should be removed
48. Next steps - Options
Express release
• Cons
- Potentially difficult to locate the benefitting party
or parties – especially if subdivisions of the land have
taken place
- You are alerting the beneficiary to the covenant –
they may not be aware
- Expense
- Precludes / invalidates insurance
49. Insurance
• Pros
– Quick and easy to obtain
– Can be cheap depending on how old the covenant is
• Cons
– Does not get rid of the problem
Next steps - Options
50. Next Steps - Options
Challenge the Covenant
• Pros
– Can get rid of the covenant if successful
• Cons
– Can be more time consuming that just getting
insurance
– Flags the issue to the person with the benefit
51. Upper Tribunal
• Pros
– Gets rid of the covenant if successful
• Cons
– Can be difficult to prove
– Expensive – costs rules
– Time consuming
– Flags the issue to the person with the benefit
– Compensation payable
Next Steps - Options
52. Upper Tribunal - what is
considered?
• The development that is actually planned or the use for
the property, and whether there has been any grant or
refusal of planning permission in the relevant area
• If there have been changes to the character of the land
burdened, or the neighbouring land
• Whether there was been an express or implied release
• That the restriction should be removed if there had
been no injury caused by the removal
• Any other material considerations
56. Introduction
Todays content:-
• Developer contributions
• Planning Conditions
• Application and Appeal Fees
• Alternative Providers
• Special measures designation
• Housing delivery test
• Revised NPPF
• Compulsory Purchase Reform
• Planning Freedoms and Planning in
Principle
• Local Plans
• Neighbourhood Plans
• Permitted Development Rights
• Revised NPPF
• S106 Dispute Resolution
• Application and Appeal Fees
57. Developer Contributions
• The future of the CIL is due to be determined in the Autumn Statement
(22 November 2017)
• As an example, CIL has generated £16 million for Westminster Council
• Local infrastructure tariff proposed
– Supplemented by bespoke s.106 and streamlined examination
arrangements for charging schedules
• The Autumn statement will reveal government’s intention on the
implementation of section 158 of the Housing and Planning Act 2016
(resolution of disputes about planning obligations)
• No news on Conservative manifesto pledge to work with housebuilders on
ways of capturing increased land values form building for reinvestment in
local infrastructure
58. Planning conditions
• Ministers now have powers under the
Neighbourhood Planning Act 2017 to set out
planning conditions and require agreement to their
imposition
• No secondary legislation detailing what types of
condition will be acceptable has been passed
59. Application and appeal fees
• Ability for LPA to set significantly higher planning application fees
mooted in February 2016 (including fees for prior approval under
new PD rights)
– Councils can increase fees by up to 20% with an additional 20%
increase possible for councils that deliver homes their
communities need
• Necessary regulations promised in July, but draft regulations only
published on 25 October 2017
• No consultation for fees of up to £2000 for submission of planning
appeals.
60. Alternative providers
• Government reflecting on whether to bring in
regulations to test the practicality and desirability
of competition in the processing of planning
applications
• No timescales on implementation
61. Special measures designation
• No local authorities will be designated under
‘special measures’ this year
• Authorities designated as such can be bypassed by
applicants, who can apply directly to the Planning
Inspectorate
• However this may be introduced in spring
62. Compulsory purchase reform
• Clarifications regarding the no scheme rule
contained in the Neighbourhood Planning Act 2017,
which dictates that any increase or decrease in
value arising from the scheme underlying a CPO is
to be disregarded in assessing compensation
liability, came into force on 22 September 2017.
63. Planning freedoms & permission
in principle
• Government is also looking at implementing the planning freedoms
scheme which would allow national planning rules to be relaxed
temporarily to support increased housebuilding. Measures include:
– Reducing the standard and duration of permissions from 3 to 2 years
– Requiring housebuilders to notify planning authorities of timescales
– Allowing councils to take developers’ track records on build-out into
consideration when considering applications
• Since April, regulations have been in force that allow councils to grant
planning permission in principle for housing and compatible non-
residential developments on suitable sites on brownfield registers
• Regulations on criteria for inclusion on such registers also came into force
in April and all authorities are required to produce them by the end of
2017
64. Local plans
• Early 2017 deadline for up-to-date plans has passed
• There is no timetable yet for the implementation of intervention
powers
• The proposed criteria for intervention are, where:
– The least progress in plan-making had been made
– Policies in plans had not been kept up to date
– There was higher housing pressure
– The intervention would have the greatest impact in
accelerating local plan introduction
65. Neighbourhood plans
• Post-examination neighbourhood plans to be treated as
material considerations in determining planning applications
• Further provisions are expected including a more
proportionate process for modifying neighbourhood plans and
neighbourhood development orders and measures to improve
council support for neighbourhood planning groups
• The national planning policy update will allow
neighbourhood plans to set green belt boundaries when a
green belt review is called
• £22.8 million to help develop neighbourhood plans
66. Permitted development rights
• There has been no further news form the
government in relation to permitted development
rights for demolition of office premises and their
replacement with new housing
• Government has proposed a new right to convert
agricultural buildings up 750 square metre into up
to 5 new dwellings to meet local need
67. Revised NPPF
• The government will be working on a revised NPPF towards
the end of the year
• More clarity is hoped for on the goal of ‘high quality, high
density housing’
• The revised NPPF is expected to confirm the reasonable
options which councils will need to show before considering
green belt releases
• The NPPF is also expected to implement measures for
proactive planning in the rental sector
68. Revised NPPF
• The government is consulting on proposals to ensure that the right
homes are built in the right places. Consultation ended on 9
November
• The proposals in the consultation include:
– A standard method for calculating local authorities’ housing
need
– How neighbourhood planning groups can have greater certainty
on the level of housing need to plan for
– A statement of common ground to improve how local
authorities work together to meet housing and other needs
across boundaries
69. s.106 Dispute resolution
• Intended to "speed up section 106 negotiations and help
housing starts to proceed more quickly", according to
planning minister Brandon Lewis
• Developers would have to bear in mind the costs which
may be incurred if they go for dispute resolution
• Concerns it could protract the process
• However, developers will be keen to use the
mechanism if it leads to better decisions
• May place additional requirements to reveal detail of
economics of development
70. s.106 Dispute resolution
• The resolution process may most frequently be used to
overcome differences about the viability of providing
affordable housing at the level required in the local
plan
• Councils may have to compromise on planning policies
as result of the mechanism
• Difficult to impose outcome on developer- could decide
not to go ahead with scheme