Investment property ownership in a company or trust structure: is it right for you and your investment strategy?

As an investor you have the opportunity to purchase your investment property in a company or trust structure rather than your own name.  But what is the difference between a trust and a company?

Before we start, take note this article is intended for general information only.  You should always seek the professional advice of tax and legal advisors before making any decision regarding your property ownership. We are not tax or legal advisors and this article is intended to provide a base level of information.

Both companies are trusts can have complex structures when used investment property ownership. They can be created for multiple reasons to achieve very specific objectives.  They are formed for different purposes and have different characteristics in terms of their control, set up and assets.

In this article we highlight the key differences between a trust and company structure.

Trust

  • An organisation or firm created by a fiduciary relationship in which one party, (a trustor), gives another party, (a trustee), the right to hold title or assets for the benefit of another business or individual, the beneficiary. 
  • Trusts provide legal protection for the trustor’s assets, to make sure those assets are distributed according the wishes of the trustor, and to avoid or reduce inheritance or estate taxes. Funds not distributed from a trust are taxed. 
  • A Trustee – the person who owns the assets in the trust. They have the same powers a person would have to buy, sell, and invest their own property. The trustees’ job must run and manage the trust and manage the trust property responsibly.
  • A beneficiary – the person who the trust is set up for and is usually unable to manage the trust assets for themselves because they are too young, or they are not good at managing their own money. The assets held in trust are held for the beneficiary’s benefit.
  • As an investor, if you put assets into a trust then, provided certain conditions are met, they no longer belong to you. This means that when you die their value normally will not be counted towards an inheritance and therefore will not be taxed. Instead, the cash, investments or property belong to the trust. In other words, once the property is held in trust, it is outside anyone’s estate for inheritance tax purposes.
  • A trust is a way of keeping control and asset protection for the beneficiary; a trust avoids handing over valuable property, cash, or investment whilst the beneficiaries are relatively young or vulnerable.
  • The trustees have a legal duty to look after and manage the trust assets for the person who will benefit from the trust in the end.

Company

A company represents a combination of assets and individuals with a common goal of earning profits to increase the wealth of its shareholders.  It is a separate legal entity, and is in the form of corporate registered under the companies act. A company business doesn’t include a partnership business or other incorporated group of persons.

Ownership of the assets (the property)

  • A company  usually owns tangible assets such as buildings and land.  It entitles the company to a percentage share in the assets as well as the profit of those companies on the basis of the amount of stock owned.
  • A trust can also own tangible and non-intangible asse and it owns the assets that are placed by the grantors in a trust.
The difference between - Company & Trust  structures is important for your investment

Control of the assets

Don’t forget, when you’re investing in overseas properties you must consider the factors that will impact the performance of your investment. 

  • A company can control the assets of other entities, as long as it holds the majority stocks of those companies, and has majority voting rights. 
  • A trust can only manage the assets in accordance with the trust deed terms.  Control lies with the grantor of a trust

The purpose of the particular structure

  • Company The sole purpose of companies is to manage the business operations and increase the profit, and a portion of these profits is reinvested into the business for its development. 
  • Trust – formed with the aim of providing protection to assets and other properties of a grantor.  Trusts have employees who are expert in a particular asset management.

It’s really important you get the structure right before you buy the property, because you can create tax events (both Stamp Duty and Capital Gains) essentially to sell the property to yourself, if you change the structure once you own the property.

We hope this very high level overview as helped explain the key differences between owning a property in a trust or company structure.   

Property investment is complex and multiple factors dictate whether a property is a good is investment – it’s not simply about the purchase costs.   Before making a commitment to purchase any property, be sure to run financial models so you have a really clear understanding of the likely performance of your property.    

We hope you found this article useful, read in conjunction with our other articles and this should give you an understanding of the market and why we believe there is an opportunity to invest.  We’ve produced articles for New Zealand, Australia and the UK, so make sure you take the time to consider all your options and make sure your investment is right for you.  You might also be interested to read our latest UK Market Review, for the latest on the UK’s residential property market.

Important notice:  Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect.  You use the information at your own risk and accept no liability if you rely on this information.   Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor.  You should seek independent advice from independent professionals before making any investment decision