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if you're a regular on this channel you'll know that we are all about smart property investing so we're going to talk about smart company structures the optimum way to set up the corporate structures in order to do any kind of property business i'm joined by the one and only mark alexander founder of property 118 leading website for property landlords and investors who alongside cotswolds barristers are really thought leaders in the industry for coming up with optimum corporate structures for property businesses and i'm thrilled and very excited to joined by mark alexander hi hi ranjan [Music] so make sure you uh like comment and subscribe hit the bell icon we put out new videos every week all dedicated to keeping you on top of your property game we've done quite a few videos with the two marks mark alexander property11a and mark smith of cotswolds barristers on structuring property businesses if there is anything that you feel you we should cover in future videos on incorporation or tax or property business structuring then let us know in the comments below the more likes if you've got an idea for a video that you want us to cover if it gets a lot of likes basically i'll get these guys back on and we'll do a video on it now a lot has changed in the world of property investing since i got started when i got started you'd pretty much dive in buy a few properties and worry about things like tax and corporate structures later now things have completely changed you need to think about how you're going to structure your property business right from the outset and today in this video we're going to talk about setting up the optimum smart company structure for your property business thanks for inviting me again it's great to be back brilliant to have you and when we want to talk about smart structures i can't think of anyone else who i want to have this chat with so there are a lot of labels banded about um people talk about smart companies people talk about freezer shares people talk about family investment companies um and they're things that are currently under a little bit of scrutiny and the things that currently are not um can you just uh explain for us for the lay person what we mean by a smart company as opposed to a normal one or an unsmart one yes so what people should be trying to achieve when they're buying their next property or it may even be their first property it's relevant really is what you ideally want to do is to pay the least amount of tax whilst you're alive to spend as much of your capital as possible whilst you're alive enjoy life but then leave a legacy for your loved ones as well people want to do that it's a it's a common uh answer to a question when i say what are you looking to achieve now building that legacy in your own name is a pretty dumb thing to do because it's going to be taxed at 40 when you pass up so ideally what you want is a structure that gives you control over your business while business whilst you're alive so you have things like voting rights you can still pay yourself dividends and you have everything that you can do in a normal company but grow the part of the united states that you want to leave as a legacy and a sign of your essays uh so that it's not exposed to 40 percent occurrences okay so i i get that that's a that's obviously human nature people want to keep a legacy and all and all of that sort of stuff but what is it about a smart company that makes it different from another company how am i achieving those goals through a smart company okay so a company can have different classifications of shares so you might have a classification of shares that the founders needs to own so what does a founder need well he wants to have the voting the ability to control the business he wants to be able to declare dividends to himself or his of the shareholders whoever they may be um so they're often referred to as freezer shares and you'll hear these structures called many different names but you might hear it called the smart company structure a family investment company cut structure a freezer shares company a freezer growth shares company to a very great extent they're one in the same thing but we'll come on to why we shouldn't really call it a family investment company perhaps later on but what we're doing is we're ship we're freezing the value of the owner's shares so let's take a scenario he puts he's got his normal company 100 pounds off the shelf could be a one pound company off the shelf and he lends it a million pounds it could be a hundred thousand pounds it might only be twenty thousand pounds or it could be tens of millions it doesn't make any difference the company whatever he lents a company is a liability of the company so the value of the company is the value of the shares if he then uses that money to go and buy lots of property and make some money it doesn't matter whether it's 100 000 or 100 million then ideally what he needs to do because his razor shirts his shares are frozen is spend his capital and allow the growth to accrue somewhere else now that's where you have a second set of shares called growth shares so when people set up companies off the shelf typically um all shares are equal um but in reality all shares don't have to be equal and can you talk us through the different types of shares that actually exist correct uh you're absolutely right the there are three main components to a share uh one has it got voting rights two has it got dividend rights and three what happens to the capital value of the business and how does this affect the value of that share and you can have multiple classes of share and apply all of those three or any one or two of those three to any of the multiple types of shares so you'll have heard the phrase maybe alphabet shares because they tend to be abc the efg and you might say right all the a shares have all the voting rights all the b shares have all the dividend rights and all the c shares have all the capital rates and then you might have d shares where you say they also have the dividend rights but the voting people with the voting rights decide how much dividend they get so you can mix these things up um far more than you can if you just buy an off-the-shelf company so that's ultimate flexibility and that's defined in the articles of association is it yeah memorandum articles association so that has to be specially drafted uh to meet the needs of the family absolutely and the shares need to be filed with companies house as well uh with obviously the minutes explaining what was done and why it was done so typically um a mom and dad for example can have voting uh the majority of the voting rights but can give away the capital rights in a newly formed company uh to whoever because they have nil value because nothing's happened to them exactly yes if it's a brand new company yes they can give away the capital if it's not a brand new company of course then if they give away that capital then there could be tax complications if there is already capital in value in the shares but yes certainly with anything new uh if it's only worth pounds or pence uh a few pounds or a few pence then it's not going to if even if it does trigger a tax consequence it's going to be minuscule and that's where you were talking about the liability when when a loan is then made to the new company that is a debt so that doesn't change the value of the company at all correct yeah if you've got a one pound company you lend it a million pounds yeah it might have a million pounds in the bank but it's got a million pounds liability so the value of the company is still a pound so the so so the the company um borrows a million pound that may be lent to by the parents or whoever um the company then goes out and buys some properties developed so more what have you um and then they go up in value over the next 10 20 years um so what exactly happens to that capital gain from now on the capital gain isn't actually crystallized of course until the properties are sold so as far as the balance sheet value of the company goes it's still a pound until either there's a revaluation of the property's assets and the revaluation reserve is created in the company accounts or all the properties as i say sold so actually nothing happens really um if the property it depends who's got the shares so if the b shares are in the children's names then essentially nothing has happened yet because nothing has been sold the company is still operational in the same way as it would have been whether if the children hadn't owned those growth shares that's a good point so i i guess the question should have been um if the uh one of the parent dies um then if they have given away or if the capital shares were already handed to the next generation when they were only worth a pound all those years ago effectively that growth is not part of the estate correct yes so they could have made millions but it's not part of the estate but of course it's not those shares really are not worth anything either uh because you know let's say that you i'd created this structure 20 years ago and i try and say well my kids want to sell their bishops they grow shares would you like to buy them off me ranch and there's four million in the company but you've got no voting rights you've got no dividend right so you can't wind the company up you never get the money how much would you pay for those shares the answer really is you wouldn't want you wouldn't be interested you wouldn't want to buy them would you because it would be such a ridiculously long-term speculative investment that is a good point so the open market value of some of these shares um maybe less than the assets um within that company is that what you're saying are there any formulas for coming up with these values how are these determined there are formulas uh of course the ultimate formula is what somebody's prepared a willing buyer and seller are prepared to agree a price on and there are specialist business valuers out there that will take a view on these shares but the reality is the shares are almost worthless until they're reunited with the shares that have the voting and dividend right because then the person or entity that owns these shares can can then decide what to do i liquidate the business and uh have that that money there in cash so it can actually be used okay so this is a very powerful concept of course so you've got um essentially what we're talking about is that um particularly if you set up a brand new company um whatever is done in the future is immediately out of your estate because from the conception of the company you've already given away the future growth to the next generation and you give it away now when it has real value because no one knows what that future growth is correct but you maintain the voting um by having the majority of the voting stock and i think it should be at least 75 percent so that you have full control over changes to the company rules in the articles of association as maintaining that element of control um you have full control over the direction of the company that's absolutely right and of course what you're what you're trying to do is whatever money you've put into the company you can draw that back out because it's a loan you can draw that back out when the company makes profits uh and repay your loan without having any personal income tax consequences so what you're essentially doing is not only are you freezing the value of your estate but you're reducing it by spending your capital as opposed to taking income at the company paying income tax or dividend tax on it and growing your capital so you know what you're really wanting to do is if you've got this scenario you're growing the kids well and depreciating your own some people may have read that family investment companies and certain types of structures are being looked at by the hmrc um now my understanding is they're not looking at what we have described they're looking at something different um can you kind of um summarize your understanding of what the hmrc are actually looking at um but he's all been sort of confused in the noise if you like in the media that's sort of engulfing the whole lot but this site what we're talking about is not challenged at all no uh mills and reeve i think hit the nail and the nail on the head milton reeves are a huge uh legal company they also do romantic novels don't they that's mills and boone i think you'll find it's not that i've ever read it you know more than me obviously i'm it's gone coming up my dad used to love mills and dude anyhow um so yeah they wrote this a fantastic article about this which really explains what hmrc are attacking and of course the the the words family investment company have been uh widely used so shawbot bank called family investors companies something completely different has nothing to do whatsoever with tax planning at all um but the what mills and reeve pointed out is that what hmrc are targeting is where people have tried to move large lumps of capital as potentially exempt transfers out of an estate so that's existing capital uh that they're kind of putting into the company um and then immediately gifting those shares to try and take them outside of the estate after seven years which is very different to what we're looking at here which is lending money to the company that you're subsidy subsequently going to draw out but then give away any future capital growth as opposed to money already made well i mean that makes perfect sense to me i mean in essence that's the sort of rule 101 of tax i mean once it's after the event it's after the event there's very little you can do that's why they call it tax planning because it's all about planning for the future you do something now to make the future better but once it's done it's done you know there's not much you can do with the past games you're you know it is what it is isn't it it is and tax planning and accountancy are very different things so tax planning is very much forward-looking and an accountancy is about reporting what's on what's already being done and you know it's very interesting that accountants and tax advisors do work together when they when the accountant comes up with a problem and says we really shouldn't have done this but it's a much more difficult thing to fix after the event which goes back to your very first point in that you know when you're going to do your next deal make sure it's within the right structure because it's much harder to fix after the events yes yes yes now there are um different types of um sort of folks out there really i mean there's some people who are just starting out and if you're starting out you don't really want to go through a massive exercise of setting up a lot of different companies and a holding company structure and all of that and what would you recommend as a sort of minimum smart type of structure for someone looking at getting started in property and perhaps they can bolt on other sub companies and all the rest of it later on yeah i think it really depends on how big but let's just give an example so if you're talking about a person who only whoever wants to buy one little terrorist house in the north of england uh then company structures probably aren't going to be the way to go for them anyway because of the audit costs and everything else so we're really talking about it to to get into a company structure your plans really have to be to make at least a hundred thousand pounds out of your business um now that might be buying one or two terraces and waiting 20 years or it might be buying you know something for a million and hopefully turning a hundred thousand profit within six months you know it could be all of those things i would say you know if you look at a hundred thousand being the absolute minimum profit that you're intending to make because if you if you make that money without a smart company structure then somebody's going to pay 40 tax on it that's going to cost you 40 000 pounds it's going to cost you approximately a quarter of that to set up the pro the business properly in the first place okay so that hundred thousand minimum is a is is rent roll it could be um development uh uplift type of profit or it could be uh just straightforward capital gain over over a few years so if you expect to make more than that through any one of those or a combination of those then a company structure is definitely worthwhile yeah absolutely and you have to take back to things like agents so you're if you're 80 years old and you're going to buy some investment properties um then you know are they really going to double in value during your lifestyle lifetime well you one might hope so if you're 80 years old but the reality is it's unlikely um so you've got to factor those things in as well you know somebody out of our age 40s 50s possibly even getting into 30s i'm covering all the bases here i know we're the same age and i don't want to give it away um even though you look much younger you've still will get you everywhere yeah absolutely so but yes that sort of age group fine it's somebody definitely is in their 20s or 30s thinking of starting a property investment business particularly you know for long-term investments it's a no-brainer um you know why why wouldn't you spend that little bit of extra money it's a bit like i use the analogy of building a house you know don't build your house on sand that's it's a it's a it's a popular phrase uh but if you are structuring your business and you're going to go into something for 10 20 30 years and hopefully make at least a hundred thousand possibly hundreds of or thousands or millions then it makes sense that you spend that that extra money at the beginning to put your foundations in place yes yes now why is it that um if you are looking to invest um far greater sums say several hundred thousand pounds and perhaps you're looking at doing developments perhaps you're looking at managing your own properties through a sort of lettings type function um why is it that you that those sort of people start to look at having three or four companies within a within a group and a holding company i mean do they just like the sound of having lots of companies to their name or is there some logic to it there's a lot of logic uh of course there's there's more cost the cost of setting it up if we look at some of the mistakes and then how to solve it so some people might have a separate business for management another one for development another one for investment and another one for something else and they're all unconnected and then they decide oh well we want to move money from company a to company b or company c to company a or whatever then they start running into difficulties and what happens if one of the companies that's made the money goes bust and the creditors of the other company want to liquid want to have money from the company that's gone bust or the other company that the bus company lent it to starts to get very complicated so a lot of people like to build a triangular structure with a holding company at the top we'll call that topco uh i don't know these these are phrases that you use regularly around so you've got top coat holding company and all that company does is hold shares in other companies and then it has it creates new companies so they're 100 owned by topco and then you've got propco which might be your residential investments you might have prop co2 which is your commercial investments you may then have opco which could be your management business or your promotional business or whatever it is that you do so the prop codes are the entities that own the asset they own the property they own the property assets yeah absolutely or a devco a development company might also own assets as well but the beauty of that structure is all the income flows upwards so whenever a company makes profits that profit goes up to the top company so and i'm talking about income based profit now or trading based profits just to pick up on something there so yes a development company would own properties which are undergoing development i mean the prop co is typically properties which are held for long-term rent and and that kind of stuff and why would you need or why is it a good idea not to just develop the cup properties within the property owning company why is it worth while doing it from in a separate development company well risk liabilities and lending are the three common ones so lenders won't tend to want to lend an investment type mortgage funding to a an operational or development style business so funding is is a big one uh but it makes sense to separate them if for if for no other reason just for that there could be bat consequences there could be other other issues as well but what you want to do is have a structure where so that everything flows up when you've developed these properties you want to sell a few and that profit can go to the top co and then you may want to say oh i want to keep some of these you can transfer into company between subsidiaries with no tax consequences so if you've got two or three leftovers if you like and you want to put them into your property company you can move them into company without paying any stamp duty land tax or lbtt if you're in scotland um there's no there's no you've not crystallized any profit because you've only moved the properties within the group so there's no corporation tax structure and then of course you may want to do another developments completely separate it might be a joint venture with somebody else and of course the money now is in topco so it could create this new subsidiary and lend the money to us rather than having inter-company loans all the holding company does his own shares and collect all the profits and then distribute the profits in loans to whichever companies it wants to so um you mentioned jv's um so if we're doing a jv together our respective top cos would own uh 50 shares each in a new um special purpose vehicle company that would be set up for the purposes of that joint venture and then afterwards that would be um unwound and profits rolled up to the respective holding companies absolutely okay and obviously that allows borrowing and everything like that to be um contained within that spv vehicle that you set up for the jv it does indeed if that company was to fail for any reason then the the liability would be ring fenced to that company uh so if it succeeds the money goes to the top codes and we go again uh and if it fails then it's ring fenced in that area it's not going to affect your your property investment businesses or your other operational businesses yes yes it's not as though um people are setting these up looking to fail is to is to ring fence particularly when you're doing jv's you want to kind of make sure that your jv involvement liability is limited to that vehicle yeah it's about risk minimisation you know that's the whole purpose of business what the whole thinking of business isn't it maximize your returns minimize your risks why would i need an opco why can't i do that from one of the existing companies well you could but there are disadvantages because a property investment company doesn't qualify for entrepreneurs relief and it doesn't qualify for business property really so explain what that is if you've got an operational business and that's all it does so for example it runs a guest house or a service office accommodation or whatever it could be a letting agency or or a retailer or whatever then that business alone will qualify for those reliefs and entrepreneurs really it's been changed recently but if you sell your business you'll only pay 10 tax on the first million of capital gain on that business name if you want to leave that business to your children you can leave an operational business uh to your children uh without inheritance tax and in fact you can actually gift the shares of an operational business with that with the appropriate uh release it's actually possible for you to gift an operational business to your children without paying any tax on that disposal whereas with a property company you'd have to get the business valued and and pay the the up list so it certainly makes sense to have your property related stuff in the smart company structure with the fees of growth shares and your operational business is separate to that right i'm with you so and and of course being an operational business you've not just got well it's a trading business you've not just got um various reliefs um for iht planning um but because it's an operational business and not an asset business you can bring in people into the share structure that's what you're saying which is much more difficult to do with an asset business it is absolutely and you have to be very careful because you could actually turn an operational business into a business that doesn't qualify for business relief very easily you know let's say you've got a really successful emergency accommodation business which is deemed to be a trading business and then you go and buy some investment properties if 20 or more of the assets or the income come from the property investment business then you struggle to be able to claim business relief if you want to give away the shares after you've died or during your lifetime without paying huge amounts of capital gains tax so it really is very very important that you take the advice on what you're trying to achieve and get it putting things in boxes and making sure it's in the right box okay it's quite a lot to take in here um you know it's not just about property investing it's learning about these um these these corporate structures because otherwise you know there's not much point you have to work a lot harder doing a lot more properties don't you to make the same return uh if you don't actually think about all this stuff uh up front so i get what i get a lot of what you're saying i understand the business about giving away future growth um to offspring and all of that and um i get all that but um you know as a as a dad of uh growing up daughters i'm not entirely enthralled by some of the boyfriends i encounter um what do you do about uh the situation where you are giving away uh and um there is the uh the bozo spouse or partner uh further down the line okay so i wouldn't actually give the growth shares directly to a person so what i've done is i've got a a discretionary trust where that i put my growth shares into the discretionary trust for the benefit of the people that i want to inherit my fortune and i fully expect them probably not to want to be in the business that i'm in so they'll just liquidate everything and then all the cash will sit in the discretionary trust and that's normally what happens i know everybody wants their kids to to run the business but the reality doesn't work out that way once someone is in that discretionary trust then rather than just dispersing the money which is what a lot of people tend to do with trust is that i have written and this is the important part the discretionary trust is a small part the letter of wishes is the absolutely key component to getting your planning right because what you can do is whilst you're still alive you can write a letter of wishes to the trustees which will actually stay in force and limit what they can do for the next 125 years at which point the trust has to be dispersed so mine says you mustn't disperse the trust unless there are no beneficiaries left essentially so the idea is it keeps going down the bloodlines for all of my beneficiaries what you can do however is lend the money to them so imagine that i died and and my trustees uh are approached by my son or his my grandchildren if i've got some by then they say we want to buy our first house can we borrow x amount of money trustees will say yes that's what the trust is designed for and they'll they'll lend the money to buy the house and then of course if the marriage of that person doesn't work out the money has to be repaid to the trust on the sale of the house um likewise to keep everything uh to keep the inflation proof if you like to inflation-proof this the whole thing there's interest charged at two percent per annum by the trust it's not serviced it just has to be repaid when the asset is sold or when the person dies so do you imagine let's say my son has borrowed a million pounds and he's now got divorced and his wife says well i want half the house they say well that's fine we'll sell the house we'll pay off all the debts and then we'll have half each of what's left as opposed to him having all the money to buy the house the house gets sold and and they she takes half of the money okay okay look a couple of things couple of follow-up questions all of our follow-up questions letter of wishes to me the word wish sounds a bit wishy-washy is that actually cast iron yeah letter wishes illegal terminology of course you can change it whilst you're alive but once it's done it's done and you mentioned the trustees who are these trustees who are these people that are gonna look after everything and make sure everything is done properly so it's very normal to choose you know a sibling a best friend and so on but the reality is when you die they all they may or may not be alive anyway uh so there's probably going to have to be a professional trustee around in there somewhere and that again is where you have to be very careful because if you just choose your regular family accountant to or all they ever do is report on what you did in the past they're not necessarily the right forward thinking person same with your local family solicitor you know he may not be around either the firm may well be around but what you've got to think about is going to be very careful that you appoint a a professional trustee that's going to understand your strategy and how you think uh and deals with property investment people like you and i and and has a culture that does that um because you know we could be talking 50 years after our death and everybody we knew has also died including our kids possibly at that point so it could be our grandkids or our great-grandkids that needs uh this letter of wishes to be followed in accordance with what we're doing so it's very important to choose the right trustees okay so the the final thing that many people will have heard about is that um um trusts have been made a little bit unattractive because there's some uh tax that comes around every 10 years and all of that um so is is a trust structure still a discussion setting up a discretionary trust still still sensible absolutely it is uh so the tax it's called a 10-year anniversary tax and it's six percent of the value of the assets in the trust so if you think that it's very unlikely that uh a beneficiary is going to live more than 30 years beyond the person that they benefited from so oh so let's say you've got ten sorry three ten-year tax charges at six percent that's 18 of the value of the trust if they're only 40 years it's only 24 if it's 50 years it's 30 highly highly unlikely that you'll pay more than 50 ever um but the inheritance tax on day one would be 40 so it's a better deal if you like uh i know what and that's paid by whom the person that sets up the trust or the beneficiaries it's actually paid by the trust i see yeah so it's six percent every ten years so it's like point six percent per annum of the value of the trust bear in mind that you might set it up and you might live 30 years after you set it up then the question is well what about the tax then it's growing you know while the the value of the business is growing the value of the shares are growing well of course if they're never disposed of and there's no control over them as we spoke about earlier those shares really have no value so until you've died and the whole business is being liquidated the 10-year tax charge isn't really going to have a significant effect because six percent of something you can't sell and it's not worth anything is still nothing well as usual there's an awful lot here and i think the only thing we can really aim to do in this video is to wet your appetite for the fact that setting up a company to do property isn't a simple matter of going on the internet and buying an off-the-shelf company for 10 pound you know you can do that but you may find a few years down the line and you really wish you did it differently and it's too late to unwind so really what we've tried to do in this video mark and i is to kind of share with you or um kind of open your eyes to the fact that um structuring your property business is a a very very complex area and this is an area that you need specialist advice on and one thing that i find is that when you kind of if you want to do any due diligence on any um business person or property entrepreneur or anyone that's doing well in business you will find that they do have multiple companies to their name they don't operate just with one company and there's a reason why so there's a lot of stuff that is impossible to cover in this video because it needs to be the what kind of corporate structure you set up needs to be specific to your needs and the needs of your family um now you guys offer some specific advice on that some consultancy on there and you produce some quite detailed reports for people how do people take advantage of that service okay so you can go onto our website property118.com forward slash text you can book a consultation from there you can read lots of case studies there you can read lots of testimonials there if you want to get a little bit more information before you actually commit to booking your consultation and they charge they cost 400 pounds including that okay and then what's the next step after the consultation so you'll get uh you'll be contacted by our executive assistant team who will ask you for lots of information uh we'll then you'll then be contacted by property 118 consultants uh for an initial q a a report and recommendations will be written so that you can share that with your accountant or any other trustees advisors we then involve cotswold barristers at the video q a stage you can have your existing advisors there as well cotswold barristers will adopt our recommendations as their professional advice to you so they will do the the performing of the company and the key drafting of the memorandums and articles of association and also be responsible for the outsourcing of the other components of the planning such as will's lasting powers of attorney the discretionary trust the letter of wishes and all of these things that need to be pulled together so people might have all of these things but you know it's it's vital to have a review that pulls everything together so it kind of all matches up yes it's a very important point you make about the review because as people's businesses grow something that they may have set up uh 10 years ago simply isn't appropriate for the stage and the assets and the income that they have now correct and it could just be a simple case of their will is perfect but they've now got to freeze a growth share structure we need obviously to make sure that those voting the shares of the voting right go to the discretionary trust if we're putting that into place so it might just be one line in the will but it all needs to be looked at together okay now thank you very much for joining us mark now if you guys um got any questions or comments on what we have talked about on smart company structures then leave them in the comments below and if you've got any things that you want mark and i to cover on um property business tax or company structures let us know in the comments below and you know if there are enough people that like that comment mark and i will be back to do a video on that topic so let us know uh what else that you'd like us to answer in some of these videos and that's it for this video mark thank you very much a mountain of information as always pleasure to be back again and delighted to do more of these in future absolutely so do check out uh mark's website at property118.com um the link for the tax consulting is down below as well and see you guys in the next video