On the money

A new trend in social housing development work is the increasing number of registered social landlords who are acquiring development sites through special purpose vehicles. This involves the acquisition of a property through the purchase of a limited company, often formed solely for the purpose of owning the property.

While this can have its advantage, there are many factors to be considered before proceeding with it, not least the structure of the financing and the associated security arrangements put in place.

For a buyer, the chief attraction of an SPV is the lower rate of stamp duty – 0.5% on the price of the shares transferred – as against stamp duty land tax – which has a top rate of 4% of the VAT inclusive price of land plus, in some cases, development costs.

This can provide significant savings for purchasers who pay SDLT, though there will be no savings for charitable RSLs, which do not pay it.

No VAT is payable on share acquisitions. This could result in a real or cash-flow saving as VAT may be charged on a property acquisition depending on the seller’s VAT status.

Once the acquisition has taken place, the RSL will generally purchase the property from the SPV. This can usually be done without paying SDLT on the basis that the RSL will be the legal and beneficial owner of all of the issued share capital of the SPV.

The principal disadvantage of acquiring a property through means of a corporate acquisition is that transactions involving the purchase of property-owning SPVs are usually more complex than a simple property acquisition. Any historic liabilities of the SPV will be retained within the company and will therefore transfer to the buyer. Therefore, in addition to doing the usual searches on title and other property-related matters, the purchaser will need to undertake due diligence on the SPV itself.

Any historic liabilities of the SPV will transfer to its new owner, so searches on title are essential and the RSL must do due diligence itself

It is particularly important to check tax matters, including whether or not there is an in-built capital gains liability due to any change in value in the property during the time that it has been owned by the SPV.

The purchasing RSL should find out whether if it buys the SPV, or acquires its property, this will give rise to a corporation tax liability or a clawback of relief from SDLT because the magnitude of such a tax charge could make the deal uncommercial.

However, the due diligence need not be as detailed as for the purchase of a trading company. Many SPVs are set up for the sole purpose of holding a property, and it may be possible in such circumstances to obtain an indemnity from the seller in respect of any pre-completion liabilities.

One further issue is that the SPV must avoid giving financial assistance for the purpose of the purchase of its shares so as not to breach of the Companies Act 1985.

Breaching this can expose the SPV and its officers to both civil and criminal penalties.

The most obvious financing structure for the acquisition of an SPV would involve the RSL borrowing money from a third-party bank, which then takes security over the assets of the SPV. But this would be likely to be in breach of the legislation and therefore alternative structures must be used. Alternatively, the SPV could choose to go through a whitewash procedure, which is a procedure including an auditors’ report and statutory declaration by the directors of the SPV stating that the SPV will continue to be able to pay its debts going forward.