Opco/Propco structures have long been popular in the hotel sector. IHG, Accor and Hilton are just a few of the big names who have split Propcos from Opcos, and many smaller groups have also found it to be an attractive model.
Whilst there are, of course, commercial reasons why many hotel owners have put these structures in place, in the UK market the tax regime has also been an important driver behind these structures.
Until now, it has normally been tax efficient for the property interest to be held in an offshore company (the Propco) and leased to an onshore operating entity (the Opco) for the simple reason that any growth in value of the underlying property has then escaped UK tax.
From 6 April 2019 that is going to change.
As from that date, the UK is extending the scope of capital gains tax so that increases in the value of property after that date will fall into charge to UK tax on a sale or other disposal of the land even if the owner of the property is offshore. The charge will also apply on most sales or other disposals of shares or interests in “property rich” vehicles (meaning a vehicle that derives at least 75 per cent of its gross asset value from UK real estate). So the general rule is that a sale of shares by anyone (whether resident in the UK or not) in a Propco will also be subject to a CGT charge.
However, this does not necessarily mean the end for Propco/Opco structures.
There are a number of important tax considerations and potential exemptions that hotel owners should take into account when deciding whether or not to retain or collapse Propco/Opco structures, which are dependent on a number of factors such as whether the Propco is carrying on a trade for tax purposes and whether the Opco and Propco are in the same group or otherwise “connected” for tax purposes. Other factors including whether the Opco is resident in Luxembourg, whether Opco is carrying on a trade and the availability of other CGT exemptions (such as those provided by REIT structures) may also be relevant.
We have prepared a high level flow chart HERE summarising the key tax considerations and potential exemptions that should be considered in light of the 6 April 2019 CGT changes. However, each Propco/Opco structure will need to be carefully reviewed on a case by case basis. If you would like to discuss this further with a member of our Tax team, please contact your usual Fladgate contact or contact Amy Collins or Neal Todd.