estate holding structures
In some situations, it is sensible to use a holding structure such as a company for fiscal and succession planning or to avoid restrictions or licensing requirements. There are also other factors which will dictate whether a property should be held in a holding structure. In many cases, the decision will be determined by the specific country in which the individual is purchasing the property as each country’s specific regulations will have a different effect on their tax and succession planning. In addition to tax and succession planning aspects, it is also desirable, for confidentiality and asset protection purposes, to hold real estate via the intermediary of a company rather than directly, as this prevents the effective owner from appearing in the ownership or land register.
The more expensive the real estate, the more sense it makes to use a holding structure rather than place the asset in the individual’s name.
However, in some circumstances it is preferable to acquire the real estate directly in one’s own name. Firstly – for example in France – comprehensive regulations aim to prevent acquisition via the intermediary of companies and thus make such procedures more complicated – with the notable exception of the domestic SCI.17 Secondly, this can even have tax disadvantages, as companies are often liable to higher capital gains tax than directly owned properties at a resale. Furthermore, most companies (again perhaps with the exception of a French SCI) incur administrative costs. In many countries it therefore makes more sense to acquire properties in the lower to middle price range directly in one’s own name. However, careful planning is of particular importance in such cases, and includes drawing up a suitable will or possibly also acquiring the property in the name of your children.
The use of a holding structure has differing effects in the various jurisdictions. Therefore it is important to understand the implications of the residence status and the local tax and succession laws. Often, companies are usually set up in countries where company taxes are nil or limited and annual maintenance costs are low. Such jurisdictions include Anguilla, the BVI, Luxembourg, Nevis, Malta and Panama, where companies can be set up and maintained at low cost and with no or only limited local tax consequences. However, tax consequences may have to be taken into account depending on the country of residence of the company owner and the country from where the company is effectively managed. So it is essential to clarify all circumstances and tax consequences carefully – including in the country where the company owner is resident.
It is also worth noting that corporate and other holding structures (such as private foundations and trusts) are often recommended and also implemented despite failing to pass a thorough scrutiny by the relevant tax authorities – where such scrutiny takes place. Many countries have now extended their relevant tax laws with very extensive anti-abuse regulations. If more than 50% of a company’s assets consist directly or indirectly of real estate, that company will often be taxed just like real estate. Thus the capital gain from the sale is also taxed on the same basis (and cannot simply accrue tax free in a zero tax country) when the responsible tax authorities discover the true nature of the transfer. Ultimately, many company structures are based on the transfer of company shares without the notification of the tax authorities. Although it is often highly unlikely that the tax authorities will ever find out about the transaction, it cannot form the basis of a legal arrangement and sound planning.
In 2012, new rules relating to dwellings worth over GBP 2 million held by corporate structures came into force in the UK, making it essential to take professional advice if you own, or are considering investing in, valuable real estate in the UK.
Real estate transactions
The buyer generally bears the greater transaction risk, as is fittingly expressed by a principle of Roman law: Periculum est emptoris18, or in other words: Caveat emptor19. That is why certain precautions and clarifications are needed prior to every purchase in order to minimize the risks. As a long-term investment which usually ties up greater capital, the acquisition of real estate should be planned and carried out in a careful and rational manner.
Once the buyer has identified the target property, there are a number of practical and legal criteria that the buyer should observe thereby ensuring full and proper title to the property. Besides restrictions imposed by the country, there may be problems with the seller’s title, third party claims and other onerous issues that are not immediately apparent. It is imperative that the buyer investigates the title thoroughly and carries out the necessary due diligence, ideally with the help of a legal advisor.
The seller must ensure that he can produce all authorizations (e.g. consent of his spouse) needed for the purchase, as failure to do so would delay the transaction.
In most countries the seller is obliged to inform the buyer of any defects. As a rule, the seller must also inform the buyer of the existence of any preemption rights. Often, the seller is liable to a comprehensive obligation for information and disclosure and bears corresponding liability to the buyer. Accordingly, it is essential for the seller to settle all questions of liability in the agreement in a detailed manner. In general, it is recommended wherever possible to exclude all liability by the seller from the agreement (this is also common practice for re-sale property in most countries). This liability exclusion should be comprehensive and expressly include liability for legal and material defects, error and damage compensation, as far as this is permissible on the basis of the local law. In any case, care must be taken to ensure that the sales agreement contains no guarantees which the seller is unable to satisfy. If the seller makes any representations and warranties, a carefully drafted sales agreement will limit the warranties and representations to the period of time the seller has owned the real estate and exclude the periods of ownership by previous owners.
The seller should also note who is responsible for which fees – for example taxes and lawyers’ or notaries’ fees. In many cases, notaries’ fees and transfer taxes are divided on a fifty-fifty basis, but this division is ultimately a matter for negotiation. Lawyers’ costs are usually borne by the party commissioning the lawyer. However, the seller is always responsible for paying capital gains tax.
In most cases, the seller is also liable to pay the broker’s commission. This generally varies between 2% and 10% of the sale price in different countries and is usually subject to Value Added Tax (where such a tax exists).
The property acquisition taxes which are levied everywhere are as a rule borne by the buyer. However, if they cannot be collected from the buyer, they may in some countries be charged to the seller. This is particularly relevant when the seller remains resident in the same country. With regard to capital gains taxes it is exactly the reverse: they are payable by the seller but the buyer may be jointly liable if the seller doesn’t pay them – and the tax authorities may be entitled to put a lien on the property.
When apartments or houses belonging to an owner’s association (e.g. concerning the shared amenities of a condominium) are sold, the amount of any reserve or renovation fund must be determined, as this can have an effect on the sale price.
A property designed for private use should above all bring subjective pleasure to its users and not only maintain and increase its value in objective terms. Therefore, careful clarification of these factors is most important before closing the deal.
1 See Vertovec/Cohen (2008)
2 See Ong (1999)
3 Organization for Economic Cooperation and Development
4 For an overview of these rules, see Chapter 3
5 With the sole exception of Andermatt, where foreign residents can buy without any restrictions
