Tax planning case study
Effective tax planning needs understanding – whilst every property transaction is different, recognising the tax issues and reconciling the often competing tax requirements of the parties to the transaction is a constant.
Our client, a minority shareholder in a substantial private property investment company (InvestCo), was approached to participate personally in a property development opportunity which was in danger of being forfeited through insufficient funding. The original purchasers, who had made the acquisition through an LLP, were unwilling to simply sell the benefit of the contract due to high marginal rates of income tax and, although InvestCo was willing to provide funding, it did not want to be directly involved in the trading development. Our client had the necessary experience and was keen to be involved in the project but could not provide the funding.
By introducing two new corporate members into the LLP, one owned by the original members and the other by our client and InvestCo, it was possible to reconcile these differing interests and requirements. The solution enabled InvestCo to invest into the property development through a mixture of debt and equity, the original LLP members received their original investment back and, together with our client, were able to enjoy entrepreneurs’ relief on the profits returned through the winding up of the corporate members that were introduced into the LLP, giving an effective tax rate on these profits of 10%. InvestCo received its return through a mixture of interest on the loans it advanced and through a gain on its equity investment. As is often the case in property transactions, there were other, simpler, transactions possible but none that as elegantly reconciled the differing commercial and tax requirements of all the parties involved.