What are Opco-Propco Structures?
It has been very common for certain property rich businesses to set up what is known as Opco-Propco (Operating company-Property company) structures.
The basic Opco-Propco structure operates by way of a sale and leaseback process.
Opco sells the real estate to Propco for cash and Propco then leases the real estate back to Opco.
Generally, the main objective is to release capital that is locked up in real estate assets so it can be redeployed in the operating business.
What is the tax benefit?
There have also been key tax benefits, in that if the property interest is held in an offshore company (the Propco), and then leased to a UK operating entity (the Opco), then any growth in value of the underlying property would then be free of UK tax.
What’s changed?
This tax benefit will no longer be relevant from 6 April 2019.
From that date, non-UK residents holding UK commercial property will be subject to UK tax on their gains. This means that from that date almost all non-resident owners of UK land will be within the scope of UK tax on gains, including “widely held” investment funds. This brings the UK into line with most other tax jurisdictions and the theory that land should be taxed where it is situated.
The new rules will also apply to sales of interests in “property rich” vehicles – that is, entities that derive at least 75% of their gross asset value from UK land. Gains on disposal of any interest in such a vehicle amounting to 25% or more will come into charge to UK tax.
This means that from 6 April 2019, the general rule is that a sale of shares by anyone (whether resident in the UK or not) in a Propco will also be subject to a CGT charge.
What can be done?
In light of the above, investors should now consider the rationalisation of Opco-Propco structures into a single entity, so that investors may be able to benefit from either the new trading exemption or the Substantial Shareholding Exemption on disposal of the new single entity.
It should be noted that these exemptions may still apply in an Opco-Propco structure where the companies are connected for tax purposes.
Trading exemption
When introducing the new rules for capital gains on UK commercial property for non-residents, the Government also introduced a ‘trading exemption’.
This means that disposals of interests in property rich entities that are trading before and after the disposal will not be chargeable disposals where the land is used in the trade. This is likely to apply where, for example, a non-UK resident disposes of shares in a retailer which owns a significant value of shops.
It should be noted that in order to qualify for this, the trading requirements are very stringent.
Substantial Shareholding Exemption
This is an exemption regime for gains arising from disposals by companies of shares where certain conditions are met.
To qualify for the exemption, a disposal must meet all of the following criteria:
- The disposing company must dispose of shares or an interest in shares of another company.
- The company must have held a “substantial shareholding” in the other company (10% or more of a company’s ordinary share capital. These ordinary shares must also give entitlement to at least 10% of the company’s distributable profits and 10% of assets on a winding up).
- The company needs to have held the other company for a continuous period of at least 12 months in the preceding six years for disposals on or after 1 April 2017.
- The company whose shares are being disposed of must be a trading company or the holding company of a trading group.
The trading requirements under the Substantial Shareholding Exemption are less stringent, and from April 2017 only apply to the company being disposed of, as mentioned above (prior to this they also applied to the company making the disposal).
A trading company for these purposes is a company carrying on trading activities whose activities do not include, to a substantial extent, activities other than trading activities (e.g. investment activities). “Substantial extent” should be taken to mean more than 20%.
In light of the recent changes discussed above, it is important to discuss these structures with us to make sure they are no longer redundant from a tax perspective. In certain cases, it may in fact be beneficial to simplify the structure so as to be able to take advantage of the generous tax reliefs outlined above, where they would apply.
Farley Kaye FCA
Managing Partner
For more information please contact Farley:
farley.kaye@fkgb.co.uk
052 627 7472
