Buying property through a company – 6 things you need to know
There can be times where it makes commercial sense to buy the company that owns a target property rather than buying the property itself.
There can be tax savings in doing so given that there is often a material difference between the stamp duty on buying the shares of the company (normally 0.5% for English companies) and equivalent tax on the property. It also often makes sense from a structuring perspective, for instance to keep the property ring-fenced from other assets in a group, to assist with financing arrangements on larger deals or to facilitate ownership by multiple individuals.
We have set out below some of the key points that arise when buying property through a company for the first time.
1. Companies have a life of their own
When you buy a company you buy it with whatever assets and liabilities it has, not just the target property.
You will therefore need to perform tax and corporate due diligence on the company to make sure you know what those assets and liabilities are. This is in addition to the due diligence that you will need to perform on the property in the normal way.
The level of due diligence involved is less than would be required if you were purchasing a trading company of the same value and the target property will normally be held in a special purpose vehicle (or ‘SPV’) to simplify matters.
It is not uncommon, however, for this process to uncover historic liabilities that need to be dealt with in the purchase documentation or contracts that need to be terminated prior to the sale completing.
2. There are additional professional costs
The professional costs required to purchase a company are normally noticeably higher than the costs of buying the property directly.
The main reason for this is the need to do two lots of diligence – one lot on the company and one lot on the property itself. You may also need advisors in multiple jurisdictions if the company was incorporated outside of England & Wales.
The documentation also needs to deal with the division of the additional risks resulting from buying a company rather than a property. For instance, the share purchase agreement documenting the terms of the purchase will contain provisions dealing with any issues uncovered during due diligence and protecting the buyer from potential liabilities in the company. The need to negotiate these provisions adds to required expense.
3. There may be additional taxes too
This is too short an article to set out all the ways in which property is taxed differently from shares in a company. A key point to be aware of, though, is that there is normally an additional annual charge on UK residential property held through companies. This charge is known as ‘ATED’ and is normally payable on dwellings worth over £500,000. The charge is currently £3,800 for dwellings valued between £500,000 and £1 million, increasing to £244,750 for dwellings worth more than £20 million.
The current rates can be found here.
4. The timeline is different to a property purchase
When buying a property directly, it is common to have a gap between exchange and completion. This is not often required when buying a company – to simplify the process, the parties often just complete whenever they are ready without exchanging beforehand.
The need for additional due diligence, however, does mean that the entire timeline for completing the transaction can be longer with a company purchase.
There is also often a need for completion accounts to be agreed between the parties a few weeks after the purchase completes. This is deal with any assets and liabilities the value of which could only be estimated at completion.
5. Exclusivity agreements are often given
It is not uncommon for sellers of companies to be willing to enter into exclusivity agreements at the outset of the transaction. This gives the buyer comfort that it is not incurring costs on the transaction only for the seller to find another buyer.
6. The public registry filings should not be forgotten
Once the company is purchased there are a number of one-off and ongoing filings that need to be dealt with. For onshore companies, the records of the company at Companies House will need to be updated at completion of the purchase. Key ongoing filings include the annual accounts of the company, tax returns and annual filings at Companies House.
There are normally equivalent local law requirements if the company is based offshore. In addition, buyers should be aware of the recent Economic Crime (Transparency and Enforcement) Act 2022. This requires overseas companies or entities which own or purchase UK property to list their details (including certain beneficial ownership details) at Companies House.
This article is intended to be a summary only. It should not be relied on as a substitute for professional advice.