Evaluating Legal and Capital Structure for Real Estate Investments

This report provides an analysis of the optimal legal and capital structure for property investment, comparing the benefits of a Limited Liability Company (LLC) versus a partnership firm. It highlights the tax efficiencies of an LLC, including corporation tax rates and dividend options, against the income tax implications of a partnership. The report recommends an LLC structure for maximizing returns and mitigating personal liability, emphasizing the importance of understanding market dynamics and property laws. It also discusses strategies for income maximization, such as investing in rental properties, leasing to corporations, and upgrading property amenities. Furthermore, the report suggests a mix of debt and equity financing to lower costs and claim deductions, along with potential investments in other companies like Right Furniture to diversify income streams and benefit from tax relief. Corporation tax calculations are provided to illustrate the financial advantages of the recommended approach, focusing on minimizing tax liability through strategic financial planning and investment decisions.

TABLE OF CONTENTS
REPORT.............................................................................................................................................3
Recommendations .................................................................................................................7
REFERENCES.....................................................................................................................................8

REPORT
Best legal structure
Limited Liability Company.
The limited company is basically the general kind of the incorporation which limits
amount of the liability which is being undertaken by shareholders of the company. In short, it is
predominately the legal structure which ensures that liability of the members of firm as well as
subscribers is generally limited to the contribution within company. Talking of legal sense,
limited company is basically a person (Bourne, 2016). The most important and significant
benefit of limited company is that it generally provides limited liability to business owners. This
is one of the biggest reason behind entrepreneur opting for this type of business structure.
Limited liability means when business will incur the debts then the personal assets as well as
finances will be secured in eyes of law. Another biggest advantage of this structure is that it is
tax efficient.
Partnership Firm
On the other hand, limited partnership is predominately the partnership which consist
of two or the more partners. General partner mainly oversees as well as runs business while the
limited partners does not participate in managing business (Dorrill and et.al.,2018). In this,
general partner incurs unlimited liability for debt but limited partners has limited liability which
is up to amount being invested by them. The most important and biggest advantage of
partnership is that it generally requires less paperwork. Forming corporation is highly complex
process thus partnership does not require highly complicated paperwork.
Difference between LLC and Partnership.
The major difference between limited company and partnership is in terms of tax.
Limited company is highly tax efficient. Limited companies mainly pay the corporation tax upon
the profits of flat rate of around 19%. Partnership does not have the similar tax benefit. These
generally pays around 20-25% of income tax on taxable earning and thus there is no option for
partnership to minimize tax or NIC. In UK, if the individual is buying the property of more than
$125000 orf the non residential property which is more than $ 15000 then the individual have
to pay extra 3% tax. While renting the property, various ways in which rental incone is
considered which are residential letting, rent room or furnished holidays lets.
Capital structure
Out of limited company and partnership, the most appropriate capital structure which
provides maximum benefit is limited company. The most significant advantage of limited
company is that in this type of structure, directors are not responsible for any kind of debt
which the company incurs. For example- when company encounters any kind of debt then the
directors cannot be forced to sell their personal assets for covering up these debts (LEUCIUC,

2018). However this is one of the finest benefit of limited company. Another advantage which
keeps this upfront in comparison to partnership is that it is usually tax efficient. This one of the
sole reason that it is the best capital structure. The director of limited company usually takes
maximum amount which is not taxed within tax year and remainder of income is generally
taken through dividend. As in dividend, directors are not required to pay the NIC thus it is one
of the most effective tax efficient structure (Sahoo, 2016). Another advantage which makes it
more efficient structure in comparison to partnership is that the limited company is considered
as separate entity and is distinct from the owners. As it is separate entity thus it can enter wide
range of contracts under specific conditions and thus is liable for various business actions. Being
a separate entity, the director does not have the attachment to actions of company besides
their share in company. In general, the directors are not under the burden and pressure of
debts as well as obligations of business. If firm is sued then debts or liabilities are not
responsibility of directors (Schindel and et.al.,2019).
Income Maximization
To maximize the returns from investment, it is essential for the investors to take care of
few steps. Before planning to invest the clients should understand the market before the
investment are made. The property should be in accessible locations and with market
recognition. Property investment for earning returns should be made in rental properties. This
is the most beneficial as it involves regular cash flows with the tax benefits offered by the
government. The property investments always shows appreciation that maximizes the wealth
of clients. The property owners should with other things should develop knowledge about the
property laws.
They will be putting 1760000 in the business for the property investment. The returns
generated by the business will be shared by couple equally. They will be drawing 75% of the
income from business. The personal tax liability will not be occurring if the money is drawn as
dividends. Where the payment of salary will require them to pay tax.
To maximize the real estate investment. Clients can lease the property investment of
some property to have stable cash flows. Such as leasing it to other corporations who are able
to provide long term cash flows, the agreements may also include the care and maintenance of
the building. Upgrading the property with latest facilities and amenities will help in generating
higher rental returns. Taking deposit from the tenants for security and returning on leaving the
property. This amount can be invested by the owners in other revenue generating sources
(Huang, 2018,). The property investment with proper structure can help the owners in
receiving maximum benefits.
Equity investment will help the owners in getting adequate returns without having fixed
rate of returns and expenses. Equity investment will also maximize the wealth on adequate

returns. There will be fast and quick appreciation in the share prices and of the property. The
clients will take an appropriate mix of debt and equity so that the cost is lower for the business
and the benefits from it could be maximized.
Investment in real estate company.
Couple may make investments in scheme of fIt will be most beneficial for Mr. and Mrs.
Lucky Windfall to trade as limited company. Couple may establish a limited company as real
estate investment company. The limited company are established after carrying out the
required regulations. There are number of benefits like the commercial income will be charged
at single rate. Company can get tax benefits on the revenue expenses incurred over the
property (Investment Vehicle, 2019). Mortgages over the property will allow deductions for
company. Other benefits that could be availed are that it can avoid double deduction of tax
(Park, 2016). The tax rate charged on investment company is 19% which is further reduced to
17%. This is far lower than the rat charged to rental income of partnerships and individuals. The
partners must pay tax rate of 20% to 40% and 45% for the additional rates. The LW will be
investing the money in company as equity capital which will help them in generating interest
income. Personal tax will only be paid by them over the interests expense. Keeping the lottery
will not be increasing the worth of investments that are made in property.
Company should use a ratio of 2:3 of debt and equity for financing the company for
investment. The adequate mix of both of both the sources will allow in reducing the costs as
well as in claiming deduction.
Couple will also invest in Right Furniture as the company is not having high number of
shareholders so that they will get adequate returns over their investments. They can
investment around 15000 each in the business. It is a furniture business that provides furniture
to its global customers. It is having total of 2500 shareholders and have equity of 6.04% over
shares. This means there will be a value addition on their investment as per the rate of equity
of 6.04%. This will also provide them with tax relief of 30% on investment also they will not be
charged to capital gain tax.
Corporation tax calculation
Corporation Tax Calculations
2020 2021 2022
Rental Income £123,200 123200 123200
(From 16 property)
Expenses
Running expenses £24,640 24640 24640

Commission Charges £12,320 12320 12320
Tax return charges £3,000 3000 3000
Total Expenses £39,960 39960 39960
Interest Cost @ 9% £0 0 0
Profit Before accounts £83,240 83240 83240
Profit liable to corporation tax £83,240 83240 83240
Corporation tax due £15,816 15816 15816
Corporation tax calculations
Working Notes
Property Investment 20,00,000
Number of Property 16
Average Investment 110000
Total Investment 1760000
Rental Yield 7%
Rent for the year 123200
Running expenses 20%
Running expenses for property 24640
Agent's Commission Rate 10%

Rents for the year 123200
Commission Charges 12320
Tax return charges 3000
Capital Structure
Total Investment 1760000
Equity Capital 100.00%
Equity Capital 1760000
Debt Capital 0
Total 1760000
Appropriate mix of debt and equity in capital structure.
The calculations show that the tax liability will be minimum from choosing the limited
company investment vehicle. The total income of the clients from rental property will be 7% of
the investments. The annual rental income will be £123200 as per the prevailing rates for the
company (Best and Kleven, 2017). The taxation system allows for the deduction of revenue
expenditures. The revenue expenditure is the running cost that is amounting to £24640 and the
commission charges paid to the agent for the collection of rent from the property. Commission
charges of £12320 can be claimed as expense and return filing charges of £3000.
The debt equity structure will help them to reduce the tax liability. As they will be able
to claim deductions for the interest income in its individual income as the income will not be
from property investment. All withdrawing money as dividends will avoid double taxation. The
dividend will be taxed in the company and exempt in their hand. The interest over lending
money in company will be reduced by splitting it between the partners.
The capital structure consists of debt also, that requires the interest payment over the
debt financing. The average rate of loans over property in market is 9%. Bank loans are
available at much higher costs therefore the interest rate of 9% will be providing adequate

return to the investors but she has not adopted for debt.. Considering the rate the finance cost
of company will be 0. The finance costs must be incurred by the company by payment of
interests. Company can claim the interest expenses for the business. The interest expenses
allow tax efficiency. The provisions of taxation law also provided for the limits for interest
deductions (Ducat, Headshot and Ling, 2017). The legal fees paid related to the property has
already been included in the cost of investment.
The tax rate also depend on the manner in which money will be taken out of business.
Taking out money from business as dividends will be involving interest of 7.5% above £2000.
Taking money as salary will require the company to operate PAYE but this will be much more
expensive in comparison with the dividend methods (Property Investment, 2019.). They can also
claim for capital allowances for the property purchases at the rates given by government for
buildings. The capital allowances
can be further used for reducing the tax liability for the year of company. The above
calculations are made without considering the capital allowances.
Recommendations
Mr. and Mrs. LW should for the investments should go for the investment vehicle of
limited company. The limited company will provide more tax benefits as compared with other
investments vehicle. Investment through company will allow them to claim deductions for
various expenses such as capital allowances. The tax rate of real estate company is 19% where
the rate of individuals it is from 20% to 40%, which is much higher. Therefore, the investment
through debt and equity financing in limited company will be beneficial. It will also be much
easier for the corporation to transfer the interest to their children.
The LW investors are advised of investing in the company as only equity. She will be
investing the whole funds as equity and nothing as debt. Using the equity finance will provide
the couple with return of 83,240. It is most beneficial source of financing as the company will
not be required to pay the interest on the debt. Tax consequence can be reduced by splitting
the income between the couple. It will be reducing the tax consequence and increase the
benefits.
The transfer will attract tax consequences for the property being transferred. The
transfer can also be made by transferring the shares of company to children this will not involve
stamp duty. They can transfer by share transfer or by inheritance. This will not involve high tax
consequences for the children and parents.

REFERENCES
Books & Journals
Bourne, N., 2016. Bourne on company law. Routledge.
Drill, J and et.al.,2018. Partnership Law. SMU Annual Texas Survey.4(1). p.307.
LEUCIUC, E.G., 2018. DECISIONS OF THE SOLE PARTNERSHIP WITHIN THE UNIPERSONAL
LIMITED LIABILITY COMPANY. LEGISLATIVE AND DOCTRINE ASPECTS. Ecoforum
Journal.7(2).
Sahoo, D.R., 2016. The Limited Liability Partnership Bill 2006-An Analytical Study. Splint
International Journal of Professionals.3(8). p.135.
Schindel, M and et.al.,2019. Partnership Law. SMU Annual Texas Survey.5(1). p.273.
Huang, Y., 2018, August. Design of the Elements of Real Estate Tax on Possession from Real
Estate Tax in the UK. In 3rd International Conference on Judicial, Administrative and
Humanitarian Problems of State Structures and Economic Subjects (JAHP 2018). Atlantis
Press.
Park, A.U., 2016. The REIT Niche and the UK REIT Market. Working Paper, Pepperdine
University.
Best, M.C. and Kleven, H.J., 2017. Housing market responses to transaction taxes: Evidence
from notches and stimulus in the UK. The Review of Economic Studies. 85(1). pp.157-
193.
Duca, J.V., Hendershott, P.H. and Ling, D.C., 2017. How Taxes and Required Returns Drove
Commercial Real Estate Valuations over the Past Four Decades.
Property Investment. 2019. [Online]. Available through : <https://www.landc.co.uk/mortgage-
guides/tax-buy-to-let-property/>.
Investment Vehicle. 2019. [Online]. Available through :
<https://highreturnrealestate.com/form-real-estate-company-rental-property-
investing/>.