What is a Joint Venture?
A joint venture (JV) is an alternative business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This may be a new project being entered into together or some other joint business activity. In this briefing note we examine the two primary options for European Investors to engage in a Joint Venture activity.
Option 1: Special Purpose Vehicle (SPV)
In this route, investors wishing to JV together either on a specific project or on a longer-term basis, set-up a company with joint shareholding between all the investors, e.g. 4 investors, each with 25% shareholdings.
In order to remove their profits, they have the following options:
- Specific projects where the property is sold off for profit:
- Liquidate the company – this is expensive at £3k plus
- Remove the funds via
- Salary & Dividends or
- Dividends only
- Then Strike off the company after 3 months of non-activity and bank account closed
- Longer term JV perhaps for flips where funds are re-invested on consecutive projects
- Take Income via
- Salary & Dividends or
- Dividends only
- Take Income via
There are several variables which means that generic advice cannot be categorically applied to all European investors. It needs to be reviewed on a case by case basis as they may have other UK income or may not be currently resident in an EU country, in which case we need to look at the Double tax Treaty for those countries. Also, if they spend large amounts of time in the UK we also need to establish if they do fall foul of being resident under the Statutory Residency test.
Hence the following explanations are options that would need to be reviewed in the light of individual circumstances and should not be relied upon for all.
In certain circumstances it could it be more beneficial for a salary to be paid by the Company. The individual can apply to have a NT (No Tax) code where they are employed by a UK company, but all of their work is done outside of the UK. This might be preferable to taking dividends and having to complete a tax return and it’s also tax-deductible so saves Corporation Tax.
Shareholders can take income from the company in the form of dividends. Dividends are paid in accordance with the percentage of shares the investor has in the Company and cannot be varied easily without tax and other consequences. Varying dividend rights away from the shareholding is fraught with risk and should be avoided.
There are two routes available to shareholders:
- Shareholders can decide to certify to Her Majesty’s Revenue and Customs (HM Revenue and Customs or HMRC) that they are non-resident in the UK, and they don’t have any income other than dividends from the UK. This will mean that the dividend income is treated as non-taxable in the UK (actually their UK liability to tax is restricted to tax deducted at source, which is zero for dividends) and only taxed in the shareholders EU country of residence. This can be done by applying to their countries Tax Agency for a non-residency certificate in the UK; the Tax Agency will send this directly to HMRC.
This will mean that the individual need not complete a UK Personal Tax Return, however they will lose the right to the personal tax allowance – important and potentially costly if they have other UK income.
- Shareholders can decide to use the UK Personal Tax Allowance. In this case the individual completes a personal tax return, claims a personal tax allowance, pays tax on the dividends in the UK, gets relief in their EU country of residence under the double taxation treaty for the UK tax paid and if the rate of tax in their EU country of residence is higher, they pay the differential. If not, they have paid the UK tax and they don’t pay any more.
Option 2: Overseas Investor Loans into an existing Limited Company
In this case there are again two options:
- Term Loan with guaranteed interest
Here the investor loans capital to the company with an agreed rate of interest either re-payable in regular instalments or with interest rolled up at the end of the agreed term.
- Loan with Profit Share
Here the investor lends either on a secured or unsecured basis with an agreed percentage of profit share which effectively equates to a loan with a variable rate of interest, which again is either re-payable in regular instalments or with interest rolled up at the end of the agreed term. Interest would be accrued in the books based on accounting estimates.
The Investor loan could either be from a private individual or a company (corporate investor).
In the UK, tax must be paid by the Company to HM Revenue & Customs whenever a Company pays interest to an individual. The individual is either an investor receiving interest returns or a director/shareholder where a director’s loan has interest applied to it. This applies at the point when the interest is actually paid out.
Even if the Director does not actually take the money back personally, taking the interest to the Directors loan account is still treated as being payment and so triggers the tax charge which has to be returned each quarter to HMRC when interest is paid out. Accruing the interest and not crediting it to the Directors loan account does not trigger the tax charge, until such time as it is credited or paid to the Director. In order to reclaim the tax paid, they would need to complete and file a UK tax return each year. However, if the director is not UK resident for tax purposes and completes the claim above, the taxation charge can be avoided. Advice should be sought on a case by case basis as this may or may not be beneficial, depending on the individual’s income streams.
Where interest is paid to an individual, the quarterly filing and requirement to deduct tax applies, but only when the interest is actually paid out. Investors, if individuals would also then need to complete a personal tax return. The Company would need to provide the investor with a certificate of loan interest to show the tax and interest paid. Re-investment is treated as being payment too as the interest is made available to be reinvested even if it is not physically paid.
However, an exemption can be obtained but the investor has to make the application to HM Revenue & Customs via their tax authority. Once the exemption is claimed, HMRC will issue a notice to the company and then all future interest payments can be paid without deduction of tax. It can’t be applied retrospectively.
Mechanism for reporting interest and payments to HMRC
Consider an owner managed company whose directors or other private investors had deposited a considerable sum with the company that was credited to a loan account in the company books. Periodically, the company made an interest payment to the individual involved.
When the interest payment was made the company would have to pay 80% to the director and 20% basic rate tax to HMRC. The company would then be required to notify HMRC that the payment had been made and pay over the tax deducted.
The CT61 is the form that would need to be completed and submitted to HMRC. Regular payments would have to be reported and paid quarterly. To ease the red-tape, payments of interest can be made at the end of the tax year in which case only one return would be necessary.
Where the investment is coming from an overseas company and not an individual this would simply be treated as a commercial loan and would not require the same treatment as above for the Private Investors. The capital would be repaid with interest and the interest would be treated as revenue/profit in the overseas company which, depending on the tax rules in their country, may pay the equivalent of Corporation Tax in the country of residence. The UK company would treat the interest payment as an expense or “cost of sale” in its books.
Note on loan security
There may be multiple properties sat within the Property Company that the investors are loaning into. If the investor wishes to lend on a secured basis, then the loan agreement can indicate a charge over the particular property project they are working on. The charge will usually be registered at Companies House by the solicitor handling the conveyancing, however it is important to note that if a charge is not registered within 21 days, it may be difficult to recover the debt if the company becomes insolvent. The 21 days start the day after the charge is created. If multiple investors are lending into a single project, then they can all be listed on the legal charge document.
This Factsheet is a summary of company & tax legislation for property businesses and is not intended as advice. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should take personalised advice. This document should also be considered in the light of the regulations related to the promotion of unregulated collective investment schemes (UCISs) and equivalent pooled vehicles to retail investors. The new rules are published in the FCA Policy Statement PS13/3.
Further Information & Services
PERSONAL ADVICE ON ACCOUNTING AND TAXATION OF YOUR PROPERTY BUSINESS
UK COMPANY FORMATION AND REGISTRATION OF BUSINESS
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Liz Noble BFP FCA
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