Opco-Propco structures and Family Investment Companies (FICs)—operating company and property company arrangements—have become a cornerstone of tax-efficient business planning and risk mitigation strategies.

By separating operational and property assets, this approach provides both financial flexibility and security.

This guide explores the nuances of Opco-Propco structures, highlighting their benefits, implementation steps, and potential challenges.

Understanding Opco-Propco Structures

An Opco-Propco structure involves the separation of a business’s operating activities (managed by the operating company, or "Opco") and its property assets (held by the property company, or "Propco"). Typically, the Propco owns real estate assets, which it leases to the Opco at an arm’s-length rental rate. This separation creates distinct legal entities, enabling tax efficiencies and risk containment.

Example of an Opco-Propco Structure in Practice

Case Study: Retail Business

Opco: Operates a chain of retail stores, focusing on sales and customer service.

Propco: Owns the retail premises, charging market-rate rents to Opco.

Outcome: The Propco’s stable rental income secures long-term financing, while the Opco reinvests its operating profits into expanding its product lines.

Future proofing: Enables Opco to be sold in the future as a tax-free sale by Propco, assuming Substantial Shareholding Relief applies

Is an Opco-Propco Structure Right for Your Business?

Implementing an Opco-Propco structure requires careful planning and professional advice to navigate tax regulations, legal requirements, and financial considerations. This structure is particularly beneficial for businesses with substantial property assets and those seeking long-term stability and tax efficiency.

Might you look to sell Opco in the future - this structure enables:

Flexibility on what is sold and what is retained, and with the property out of the Opco can make the sale of Opco more achievable for buyers - for example a Management Buy Out ("MBO") team
A Tax-Free sale by Propco, of its investment in Opco - even more beneficial since the 2024 Budget

Benefits of Opco-Propco Structures

1. Asset Protection

Separating property assets from operational risks insulates critical real estate from potential claims in the event of Opco insolvency or legal disputes.

2. Tax Efficiency

Rental Income: The Propco receives rental income, subject to corporation tax, which may be lower than income tax rates for individuals.

Capital Gains Tax (CGT): When selling property, the Propco can benefit from reliefs, reducing CGT liabilities.

Inheritance Tax (IHT) Planning: Shares in the Propco can be transferred or held in trusts, facilitating effective estate planning.

Corporation Tax (CT): no CT on the sale of shares in Opco, so long as Substantial Shareholding Exemption applies

3. Financing Flexibility

Banks and investors often view property assets as secure collateral, enabling Propco to secure financing for expansion or reinvestment.

4. Operational Focus

The Opco can concentrate on business activities without tying up capital in property ownership, enhancing operational agility.

Structuring an Opco-Propco Arrangement

1. Establishing Legal Entities

Set up separate limited companies for the Opco and Propco. Each entity should have its own directors, shareholders, and financial records.

2. Transferring Property

The property is either sold or transferred from the Opco to the Propco. This process requires a formal valuation and may incur Stamp Duty Land Tax (SDLT) or Capital Gains Tax (CGT) unless reliefs are applied.

3. Lease Agreement

Draft an arm’s-length lease agreement between the Propco and Opco. Key terms should include:

Annual rent

Maintenance responsibilities

Lease duration and renewal terms

4. Financing the Propco

Propco financing can be achieved through:

Loans secured against property

Shareholder capital

External investment

Asset Protection

With over 35 years experience of advising SME's on structures aimed at asset protection, we can help you ringfence your valuable assets, be they:

- Land and Buildings

- Plant and machinery

- Goodwill

- Cash reserves

- Intellectual Property - Trade Marks, client data, know-how etc

Tax Implications of Opco-Propco Structures

1. Corporation Tax

Rental income received by the Propco is subject to corporation tax. However, allowable deductions such as maintenance and interest expenses can reduce taxable income.

The sale of shares in Opco will be free of corporation tax, assuming reliefs apply, which offers a huge tax saving for Shareholders in Propco.

2. VAT Considerations

If the property is opted for VAT, rental income will attract VAT. Ensure Opco can reclaim this VAT under normal trading conditions.

3. SDLT

Transferring property into the Propco may trigger SDLT liabilities. Group relief can mitigate this if Opco and Propco are part of the same group.

4. CGT

Selling property from Opco to Propco can result in CGT liabilities, which can be deferred or reduced under specific conditions.

5. IHT Planning

Shares in the Propco, rather than direct property ownership, provide greater flexibility in estate planning and may attract Business Property Relief (BPR) if structured correctly.