How to Structure a Join Venture
When looking to Joint Venture (JV) with another person (or persons) on a property purchase it is important before entering into any deal that you consider the how the JV Is structured.
There are two main ways to structure a JV, the first of these is what’s known as a Special Purpose Vehicle (SPV). An SPV, is a separate legal entity that is created for a specific objective, in this case a property purchase. It is a distinct company which has its own assets, liabilities and legal status which isolates financial risk.
For example if you and a partner decided to enter into a JV to buy a house to renovate and sell and the profits were going to be split equally, you would set up a new company at Companies House whereby you own 50% of the shares each. Once the company has been created you must then set up a business bank account to handle any transactions related to purchase. As the new company is a going concern, you must submit yearly accounts to HMRC and pay the relevant taxes associated with it. Despite this, an SPV can be an effective tool to reduce taxes overall, as Capital Gains Tax for higher rate tax payers is 28% whereas Corporation tax is only 19%.
The other way to structure a JV is through a Deed (or Declaration) of Trust. A Deed of Trust is a legally binding document that records the financial arrangements between joint owners of a property, and/or anyone else who a financial interest in the property. This agreement is entered into at the time of purchase, and should certain circumstances arise in the future such as the property is sold – it outlines exactly who is entitled to receive what. For example, instead of setting up an SPV, you or your JV partner could purchase a property to renovate and sell in your own name or in your own company. You would then have a deed of trust written up which would state that when the property is sold, your JV Partner is entitled to 50% of the profits.
There are pro’s and con’s for both, an SPV is probably the more secure of two, however if you only intend to do one transaction you must weigh up whether the costs involved of setting it up are worth it. For a one off transaction a Deed of Trust may be the way to go however if you plan on doing multiple projects together then I would definitely look to set up an SPV.