So, a seller suggests that you buy the special purpose vehicle company (SPV) which owns the property in order to split the SDLT saving (0.5% instead of 4%) or to avoid the "right of first refusal" procedure under the Landlord & Tenant Act 1987 (the 1987 Act gives tenants of certain premises the right of first refusal where the landlord intends to dispose of its interest in the premises). Should you proceed? The answer will depend on the precise facts and your approach to risk. You will acquire the company "warts and all" and inherent tax or other liabilities which could effectively reduce the value of the property. Proper tax and general due diligence on the company and its liabilities is therefore crucial. On tax, it is particularly important to check whether or not the company is "pregnant" with a chargeable gain and whether or not the property has previously been transferred intragroup as a chargeable gain can be triggered when the SPV leaves the group, and any SDLT exemption claimed on the original intragroup transfer can be reclaimed. Appropriate warranties and indemnities must be sought from the seller, however, covenant strength can be difficult to assess and problems of lack of transparency and enforceability can arise as sellers will often be offshore. Retentions are generally unacceptable to sellers and a seller will wish to cap its liability under the warranties and indemnities to an amount significantly lower than the consideration paid which places unknown risks on the buyer.
In conclusion, SPV purchases are not for the faint hearted! It is usually the more entrepreneurial buyers that are prepared to take the risks inherent in such deals. The deals take longer and thereby involve materially higher professional fees. However, if relevant information is available, the transaction is analysed carefully and risks managed to acceptable levels, a SPV transaction can result in big savings on larger transactions and work to the advantage of the buyer and seller.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
