The date of 1 April 2016 is nearing. This is when the changes to Stamp Duty Land Tax come into force with an extra rate of 3% applied to the purchases of buy-to-let property and second homes. The government has also announced the slashing of mortgage interest rates relief to be phased in from April 2017.

Many accountants have begun advising their clients who invest in property to do so through a limited company structure as it would achieve more favourable tax treatment.

This seems great, BUT would “off the shelf companies” work for Partnerships that invest in property? Most likely no.

Why?

Well, partners often have some form of arrangement as to how the partnership should operate, what their individual rights are and agree rules for the admission of new partners and the resignation of existing ones. They also agree how profits should be split and when. A typical “off the shelf company” would not reflect those arrangements and whilst it may be tax favourable it could lead to a whole host of problems if not structured properly. These problems could potentially be more disastrous than paying more tax and may even lead to the breakdown of the partnership.

An example

A, C, M and P are in partnership and on the advice of their accountant have decided to convert to a private limited company structure in order to achieve more favourable tax treatment. Their present arrangement is that A, C, M and P consult each other and decide everything unanimously. They have always taken decisions in this way and have no intentions of deviating from this custom. The default position of a shelf company which has adopted model articles is that decisions can be taken by the majority of directors at a directors’ meeting. Therefore any three of A, C, M and P could make a majority decision on a key matter at a meeting contrary to their custom.

So is there a silver lining?

Like with most dull clouds, there is always a silver lining. Partners can convert to a private limited company having in place articles of association (articles) which serve as the constitution of the company. The articles can also be backed by a Shareholders’ Agreement providing further certainty as to how the business relationship should work and provide for smoother operations. One of the advantages of the Shareholders’ Agreement is that it is private amongst the shareholders and there is no requirement for it to be filed with Companies House.

How we can help

We can assist you in getting the company set up right in the first place with the appropriate share structure to meet your clients’ operational needs. In particular we can:

• Advise on the incorporation of the company and actually form it (with or without multiple share classes);
• Draft bespoke Articles of Association appropriate for your client’s business; and
• Prepare tailor made Shareholders Agreements reflecting existing partnership arrangements.

For more information about the bespoke corporate and commercial services we can offer your business, please get in touch.