I am about to set-up a holding company for a property investment portoflio and then set up further 3 to 5 Ltd companies as SPV (Special Purpose Vehicles) to buy land and appoint a construction firm to build with a view to selling at the end. All funding and locations have been identified. The holding company will have 30% shareholdings in these SPVs and the 70% will be owned by a mixture of different investors.
Question:
How do I treat the investment received from the 70% of the shareholders as they will be in the region of £1m to £3m per company total investment from multiple shareholders. Should I treat it as shareholder loans (under liabilites) as they will not be directors or as capital investment (under equity) and what are the pros and cons from a tax perspective as I am guessing if it is shown as an equity then the return of the initial investment in its entirety is taxed as dividends?
Any advice would be hugely appreciated.
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Replies (23)
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Earlier post suggests he has clients.
OP, just dump it in suspense. Why get het up over a few million.
Seriously?!
with all due respect if you are asking the question you are not qualified to be setting this up on your own - seek professional advice
6 Ltd. Companies, 3m investment and you don't know how to set it up? Maybe you should invest in an accountant. Just a thought.
I would find out what has been agreed, there will be a loan agreement or a shareholders’ agreement which will say how the funds should be treated. I don’t know how you expect us to know.
People in here ignore tax rules. They decide on clients' behalf whether this payment was a dividend and that one a loan (etc). Etc.
Even so, seeing a question that proposes to ignore the agreements the parties themselves have reached comes as a shock.
Confusing the issue, I think you need to move on from the very long dividend thread - "let it go, let it go".....
I saw it as useful context for my shock at the present query.
But OK, let's not mention it again.
Do the 70% investors in each company not have some say in what they are acquiring for their money- shares/loans/etc?
Given you are asking which the injected funds ought to be is this an indication all the various 70% parties are connected with the holder of the 30%,they have common interests with the party controlling the company owning the various 30% interests beyond these property plays?
Do the 70% investors want security for most of their funds?
What is the owner of the 30% interests paying for its 30% interests in each company?
Surely nobody is going into a property project without having all these sorts of questions, and a lot more besides , asked and answered, property investors ,as a rule, tend to be reasonably commercially savvy or if they are not they are at least smart enough to buy in some hired guns.
The holding company will not provide their own funds, their 30% is in return for their expertise and connections, where they will manage and execute the projects and will not provide funds but completely administer the end to end development of the properties. The 70% of investors are simply investors where they will allow the holding company to pay for the purchase of the development of each site as the Directors see fit, but the shareholders want advice on whether it is best to have it as loan agreements or equity invested.
I think I know the answer, but I am just seeking re-assurance here and if I don't I will be connecting with a tax specialist. If they pay for share capital then they will end up paying dividend tax on their return on investment, that is what I believe is the difference between having it as a loan and equity?
+1
Snazzy - does your PII cover cover you for this £££££££ if you plough on regardless? I would suggest it does not.
I think I know the answer....
So what do you think that answer is?
If they pay for share capital then they will end up paying dividend tax on their return on investment, that is what I believe is the difference between having it as a loan and equity?
There's rather more to it than that - Mr DJKL has mentioned some of the other questions that investors will want to address.
I will be connecting with a tax specialist
The parties also need legal advice.
So should the "project manager" even have equity, does its equity confuse matters later if say winding up the companies as parties may wish differing tax treatments/timings etc, should the 70% owners say instead be a 100% owners with the project manager paid a fee based on profits/turnover etc? Is this simpler? Why was current structure arrived upon? Is a Limited Co the correct vehicle or are you peeling an apple with an axe? How does minority 30% protect his/her position?
Step 1- work out what is intended to happen with the anticipated profits, who to get what, in effect follow the money?
Step 2-work out structure that allows Step 1 but is most flexible re wishes of each individual party to the deal, timing, triggering tax, and if possible, might have each party controlling their own tax re timing/incidence and having their position/investment/input protected?
Step 3- ensure step 2 allows for the necessary security of each party that they will as best as possible get what they are promised or if not that their downside is limited?
Step 4- iterate back through steps 1-3 to gradually improve ideas.
I tend to start these sorts of things with a basic desktop appraisal, often with cashflows, if funders I will also have model P & Ls and Balance Sheets, to do this you really need to have :
Decent accounting/cashflow prep skills
Decent tax knowledge
Decent understanding of securities etc various entities can create and how they work, maybe appreciate ranking agreements etc.
If bank finance an appreciation of the sorts of things bankers might live with and what may scare them to death.
Some understanding of how property projects work, the timings, the legals etc, if a bank what happens if project comes of the rails etc
So, go to drawing board, examine the options, and then consider what sort/type of agreement fits best, should this be a contractual deal, an LLP deal, a Limited company deal etc and take it from there.
Do the 70% investors in each company not have some say in what they are acquiring for their money- shares/loans/etc?
Given you are asking which the injected funds ought to be is this an indication all the various 70% parties are connected with the holder of the 30%,they have common interests with the party controlling the company owning the various 30% interests beyond these property plays?
Do the 70% investors want security for most of their funds?
What is the owner of the 30% interests paying for its 30% interests in each company?
Surely nobody is going into a property project without having all these sorts of questions, and a lot more besides , asked and answered, property investors ,as a rule, tend to be reasonably commercially savvy or if they are not they are at least smart enough to buy in some hired guns.
These questions are too hard.
This is what really frustrates me on here , people paint in the detail before considering the backdrop.
Why is a company structure (with all the necessary shareholder agreements) the correct approach?
Would the PM be better served with a service contract (likely easier to litigate if things go wrong)?
Why do people head down a route and then try to best fit to it/tweak it rather than first decide the best route to take?
If the big questions are not properly addressed at outset then generally the accountants and lawyers later feast on the corpse.
As has already been flagged as an issue-what do the investors want?
Have you thought of using LLP's rather than Limited companies for for the SPV's
A lot of Mysterons as to which to use.
It is these sorts of prices that now have me despairing, there is still a Joe90 car up at my Mother in Laws that belonged to my brother in law but all my toys got heaved, I have none- I wonder what my Captain Scarlett Jigsaw would now sell for, certainly from what I have seen my Action Men with all the outfits would have raised a fair bit and my vast armies of Britains etc soldiers with all their supporting artillery and castle and fort would now be worth a bob or two. ( My wife apparently used to have FAB1 and her brother Thunderbirds 2 &4 but they are also now long gone)
As has already been flagged as an issue-what do the investors want?
Free advice from the OP perhaps? viz:
The 70% [shareholding] of investors are simply investors where they will allow the holding company to pay for the purchase of the development of each site as the Directors see fit, but the shareholders want advice on whether it is best to have it as loan agreements or equity invested.
Snazzy, which shareholders ["want advice on whether it is best to have it as loan agreements or equity invested?"]
Is it the 30% shareholders [wanting advice on how to structure the 70% shareholders' investment]? or
The 70% shareholders [wanting advice on how to structure their own shareholders' investment]? or
Both 30% and 70% shareholders [wanting such advice]?
Btw if it is the case that you are wearing two hats by advising both sides (the 30% and the 70%) then as others have flagged there are inherent dangers (of your PII coverage, of your crossing the line into dispensing financial advice, not to mention being out of your depth) to which I would add a possible conflict of interest.