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Is this the end of Opco/Propco structures in the hotel industry?

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. Many smaller groups have also found it to be an attractive model.

There are, of course, commercial reasons why many hotel owners have put these structures in place: the ability to raise high levels of bank debt in Propcos which are unencumbered with the ups and downs of a trading business is one of the major advantages of holding property in this way.

But, 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.

The historic tax rationale for Opco/Propco structures will therefore no longer apply.

Does it follow that Propco/Opco structures no longer make sense for tax reasons? Not necessarily.

The introduction of the charge on 6 April 2019 is, however, a good opportunity for hotel owners to consider whether or not a Propco/Opco structure is still fit for purpose. In some cases it may be; but in other cases it may be sensible to collapse the existing structure and move to a new model.

The 6 April 2019 changes to CGT

In light of the 6 April 2019 CGT changes, there are a number of important tax considerations and exemptions that hotel owners should take into account when deciding whether or not to retain or collapse Propco/Opco structures, some of which are set out below:

  • whilst any post 6 April 2019 gains arising on a sale of the property itself will now normally be subject to CGT, there is an exemption from the new tax charge for sellers of shares or interests in property rich vehicles/Propcos that are used for trading purposes. For these purposes it does not matter whether the trade is carried on by the Propco or by a “connected” company (the Opco) so long as the trade has been carried on for at least one year on a commercial basis and it is reasonable to assume that it will continue to be carried on after the sale;
  • in a typical Propco/Opco structure the two companies will be members of the same group (and will therefore be connected for tax purposes), so it may therefore make sense to keep an offshore Propco because there may still be the possibility of a tax free sale on exit (a sale of the shares in Propco should still be exempt if the trading exemption mentioned above is available);
  • if, for any reason, Propco and Opco are not part of the same group, and not otherwise connected for tax purposes, it might make sense to transfer the interest in the property from the Propco into the Opco so as to benefit from the trading exemption: a sale of shares in that entity would normally be tax free in the hands of an offshore person and exempt by a UK resident corporate seller under the UK’s substantial shareholdings exemption;
  • if the existing Propco is resident in Luxembourg, sales of the shares in the Propco may be tax free in the UK for another reason: the UK has given up taxing rights in this situation under the UK/Luxembourg double tax treaty and, although the UK government has stated that it would like to re-negotiate the treaty, until such time as it does, this provides an alternative (or additional) exemption from the CGT charge. However, this does not mean that establishing a new Luxembourg Propco will necessarily be a good idea: the new regime contains anti-avoidance measures for holdings of shares put in place to take advantage of favourable tax treaties on or after 22 November 2017;
  • if there are other exemptions from the new charge to CGT (such as holding the Propcos in a REIT structure) this would be another reason for retaining Propco/Opco structures.

Other tax considerations

There may be other tax considerations which impact on the attractiveness of Propco/Opco structures.

Two tax reasons why maintaining Propco/Opco structures might be advantageous are that:

  • holding property in an offshore vehicle permits transfers of the vehicle to be made free from UK registration duties (neither stamp duty land tax nor stamp duty applies to transfers of shares in an offshore Propco – at least under current law);
  • VAT planning is sometimes easier with a Propco/Opco structure because the grant of an intra-group VATable lease may allow Propco to recover its VAT acquisition costs.

On the other hand, the UK’s “anti-hybrid” rules – which have the effect of denying deductions in the UK for finance expenses in situations of cross-border hybridity – can be problematic in the case of Propco/Opco structures. This is particularly so for US owned groups where a “check the box” election has been made on one or more of the underlying companies to treat the entity as transparent for US tax purposes. A number of US owned Propco/Opco structures have been collapsed for this reason.


Whilst the extension of UK capital gains tax in April 2019 will impose an additional tax burden on hotel owners – in that gains arising from that date on a sale of the property itself will normally fall into charge – that does not necessarily mean that Propco/Opco structures should all be collapsed. In many cases, the structures will remain attractive although they need to be reviewed on a case by case basis in the light of the considerations set out in this note.

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