Changes to UK tax legislation in the recent past have meant that insurers are increasingly asked to cover more and more potential tax risks under a W&I policy.

The most recent development is the legislation introduced in early July that was announced by the (then) Chancellor of the Exchequer on Budget Day 2016. This new legislation, contained in sections 75 to 81 of the draft Finance Bill, is aimed at developers of UK land who use offshore structures to gain a tax advantage. The purpose of the legislation, we were told, was to “level the playing field” between UK and non-UK developers of UK land.

The new legislation widens the territorial scope of UK Corporation Tax. Non-resident companies will now be taxed on trading profits derived from “dealing in or developing” UK land. The new rules also amend the current “Transactions in Land” regime, meaning that off-shore residents whose trade is dealing in or developing UK land with a view to making a profit will now be caught within the UK tax net. This will be the case whether the profits are derived directly through an asset sale or indirectly through the sale of shares in a property owning company.

Offshore developers and UK land The new transactions in land rulesHowden recently published an article discussing the tax risks associated with acquiring an offshore property holding vehicle and what risks insurers would be willing to cover under a W&I policy.

Or visit: http://howdenmergers.com/documents/downloads/real-estate.pdf

Non-resident companies will now be taxed on trading profits derived from “dealing in or developing” UK land

Share deals have tax advantages, but they introduce significant risk for the buyer.

Click here to access that article

At present, the exact scope of the legislation is unclear. The legislation does not contain any definition of “dealing in” or “developing”, nor has HM Revenue & Customs published any guidance on this. The new rules also alter the trigger for the transactions in land rules. In the original regime, these rules applied where the ‘sole or main purpose’ was to realise a profit from the disposal of the land, while the new rules will apply where this is ‘one of the main purposes.’ This may lead to greater uncertainty with respect to when the new rules will be triggered, as it is uncommon for an investment in land

In the context of a transaction, this potential risk cannot be ignored by buyers who are acquiring offshore property holding SPVs. Such buyers will need to ensure that the SPA contains robust protection in the form of warranties and indemnities in respect of any tax liability that could arise should the target be deemed to be holding the property as trading stock. Given the increasing trend of sellers’ capping their liability at £1 and insisting that the buyer seeks protection via W&I insurance, it will also be crucial for buyers to ensure that any such insurance policy covers the risks arising out of the legislation.

Given the present uncertainty, the risks for developers who use offshore structures are potentially wide.

to be made solely for income with no expectation of realising a gain through a later sale. Given the present uncertainty, the risks for developers who use offshore structures are potentially wide. A ground up development will obviously fall squarely within the legislation where no investment intention can be proved, but it is not clear whether anything other than that will be caught, for example a major refurbishment of a building. The table below provides an example of the potential financial consequences of an off-shore company being found to be caught within the scope of the new rules:

Although the legislation is in its infancy, the market has indicated that it is open to insuring these risks. The key to securing such cover will lie in a strong analysis which demonstrates the target’s investment intention at the time the property was acquired. It will, therefore, be important for the buyer’s tax advisers to carefully review and report on all documents which evidence the target’s intention at the time of acquisition, including but not limited, the board minutes, business plans, details of financing and marketing materials to show that the property was being marketed to tenants.

How can Howden help?

• We can advise you on the scope of due diligence that insurers will expect to see in respect of the new transactions in land rules;

• We can review the due diligence prepared in the context of the transaction to advise on whether the risks are insurable; and

• We can work, on your behalf, to negotiate an insurance policy to cover the risks associated with the new rules.

Acquisition Purchase Price £200,000,000

Profit £40,000,000

Tax on the Profit (20%) £8,000,000

Howden M&A Limited is an Appointed Representative of RKH Specialty Limited, part of the Hyperion Insurance Group. RKH Specialty Limited is authorised and regulated by the Financial Conduct Authority in respect of general insurance business. Registered in England and Wales under company registration number 7142031. Registered Office: 16 Eastcheap, London, EC3M 1BD. Calls may be monitored and recorded for quality assurance purposes.

Part of the Hyperion Insurance Group

Howden M&A Limited

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Drew Wardrope & Caroline Rowlands Howden’s Mergers & Acquisitions team provides specialist insurance solutions for M&A risks

Drew Wardrope

Associate Director

drew.wardrope@howdengroup.com

+44 (0)20 7133 1364

Caroline Rowlands

Associate Director

caroline.rowlands@howdengroup.com+44 (0)20 7133 1269

http://howdenmergers.com/