Property- the legal issues

Eric Gummers, Head of Leisure and Hospitality at international law firm Howard Kennedy talks us through some of the fractional property legal issues.

You should pay particular attention to the provisions for management and reservation so as to be satisfied that these are workable and robust.

The mechanisms for sale, transfer or exit at the point when you no longer want to use your fraction are important. The ability to resell in the future and the timescale of reselling will be critical elements of value. As a fraction owner, you will wish to see that there is an orderly aftermarket and to understand any restrictions that may apply.

Some companies provide for buy-back provisions, such as repurchase after a certain number of other sales and, if these are being included, you will want to consider this option and how it might work in practice.

At the point of purchase, the price may be subject to a value added tax or equivalent sales tax. You should establish what the anticipated indirect taxes are and take account of this in the purchase decision. If the fraction involves a direct property interest, then stamp duty may be payable.

The fraction structure itself will be liable to certain taxes on the acquisition of assets, such as homes, and will have ongoing responsibilities for local taxes and employment taxes in respect of staff.

The 2007 Budget has helpfully removed a concern for UK taxpayers such that interests in overseas real estate held through corporate structures might involve liability to tax on usage as a "benefit in kind."

Rental income derived from your fraction will be liable to tax and is required to be included on your tax return.

For condo hotels or buy-to-use-and-let offerings, you may well need to separately register and account for value added tax in respect of the rental income generated. A responsible promoter will have taken steps to assist you with the necessary administration.

On the sale of your fraction, if a gain is made on the original price, then, subject to indexation and deduction of the costs of sale, the uplift will be subject to capital gains tax.

In some jurisdictions, there may be transfer taxes or stamp duty payable on the sale of interest and the responsibility for these between the buyer and the seller should be established.