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Advice Zone: Separating hotel ownership and operation

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The influx of “new” hotel owners – property investors, private equity funds, etc – has led to an increasing demand for separation of hotel ownership from its management and operation. This separation may affect the availability of Capital Gains Tax Business Asset Taper Relief, which reduces gains realised after two years of ownership to an effective rate of 10%, and Inheritance Tax Business Property Relief, which provides 100% relief for qualifying UK resident or domiciled individual investors. In certain instances, however, separation may lead to preferable tax treatment for certain investors.

Separation would often be achieved by one entity owning the hotel asset and a separate operating company (opco) running the hotel business. The asset-owning entity would grant a lease to the opco in return for an “arm’s length” rent. The opco could then either run the hotel itself, or deal with an independent operating company.

Where non-UK resident investors are involved, a tax-efficient structure regularly used is that of a limited partnership (LP) owning the hotel asset and a separate opco running the hotel business. Separation ensures that trading activities are carried on entirely by the opco, not by the LP, so that the LP is “tax-transparent”.

Properly structured, non-UK resident investors in the LP should be taxed mainly at the 22% income tax rate on rental income received by the LP, rather than the corporation tax rate of 30%. Any future sale of the hotel should, in principle, be exempt from UK capital gains tax for non-UK resident investors. The opco must be trading “with a view to a profit”, even if, in practice, the profit is modest.

Separating hotel ownership and operation can attract beneficial tax treatment, but all transactions must be on an arm’s-length basis. This will be defined by circumstances and projected profits.

Stephen Herring, BDO Stoy Hayward

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