Finance and tax due diligence in corporate real estate transactions

Many commercial buildings in the UK held as investments are often owned through special purpose corporate vehicles (SPVs). These can be UK companies or, often, offshore incorporated and perhaps ultimately owned by a fund. Holding investment property through SPVs is commercially attractive, as it allows for risks to be ringfenced and asset-specific debt packages to be negotiated and easily secured. 

When it comes to transactions, it is usually the SPV itself that is sold rather than the underlying asset. Commercially, this can be easier, as it does not require transfer of leases or service contracts and there is also a saving in transfer taxes – UK commercial property is subject to SDLT (or its devolved equivalent) at rates of up to 5%, whereas the sale of shares only incurs a stamp duty levy of 0.5% (or potentially 0% where the SPV is not a UK company). 

Structure of UK real estate investment SPV deals 

It is common for corporate transactions in this space to be priced on a net asset valuation model, with the carrying cost of the property asset replaced with current market value. The property valuation used is a matter for advising surveyors/property consultants but finance and tax analysis is also crucial on property SPV deals.   

Examples of critical areas where we can help clients include: 

• Quantification and assistance in pricing into the deal any latent taxable gain. 
• Assessing the trading vs investment nature of the property asset held for tax purposes and quantifying any risks associated. 
• Examining corporate tax residence, especially where UK property assets are held by corporates with non-resident directors – common in the funds space. 
• Critical examination of estimated and final net asset value statements used to drive transaction pricing. 
• Overview of fund flows to ensure optimum tax efficiency, appropriate withholding tax retentions and release of lender charges. 
• Working with W&I insurance providers to ensure maximum coverage for buy-side and sell-side protection. 

How Moore Kingston Smith can help 

Moore Kingston Smith routinely advises both buyers and sellers in the context of property SPV acquisitions and sales. We have extensive experience with W&I coverage, transaction structuring and validating completion mechanisms. 

For further information please contact Mark Fielden or Mike Orton.