Investments are generally held on either:

• an individual basis (e.g. the freehold title to a property), or
• on a pooled basis, where the investment is owned beneficially by a number of investors (that may be pension and non-pension based).

Where pooled there are a number of structures that may be used. The legal structure will often not reflect the underlying investment. It can be viewed as a tool employed to allow multiple investors to invest in the underlying investment.  The legal structure used, and in which country it is based, can have many implications for investors. These include what (if any) tax is payable, what fees are charged and what legal recourse is available should the investment fail. For example, a hotel apartment investment can be structured as a limited partnership, direct partial ownership, corporate bond or membership of a company limited by guarantee. Each of these structures may provide different security and offer different returns, despite the underlying asset being exactly the same.

Here is a brief outline of some of the structures that may be used:

direct ownership

This is where the investor owns the asset directly.  The most common form is freehold or leasehold property but it can include growing timber or other physical assets.

Direct ownership does not have to be the whole of the asset and can just be part ownership (sometimes referred to as fractional ownership). This is where say each investor owns one small part of a piece of land or hotel room, however depending on how this is done the investment may be a collective investment scheme.

property syndicate

This is where investors join together to invest in a property or properties.  Here, either all of the investors are registered as joint owners of the property or one party is the legal owner with each of the investors in the syndicate having a beneficial interest.  In both cases the income, expenditure and any capital gain will be split among the investors in accordance with the syndicate agreement or trust deed.  Similarly the agreement will set out the decision making powers and control each investor has.

limited partnership (LP)

This is a form of closed ended collective investment where the investors enter into a partnership to join together to hold an investment or a portfolio of investments. Under this structure each investor is a limited partner which gives them limited liability. However, there has to be a general partner who will not have the limited liability protection but will have all the decision making powers.

Investment is typically made by way of a nominal capital contribution to the partnership, with the balance of the investment made by way of an interest free loan. On maturity, the proceeds of the investment are used to repay the loan and any remaining balance is credited to each partner’s capital account (pro rata to their investment) for distribution.

limited liability partnership (LLP)

This is similar to a limited partnership but for LLPs all partners have limited liability.  For LLPs the decision making is made by designated members who act like company directors.

Intended as a corporate structure for professionals (lawyers, accountants etc.) this structure has been limited by HMRC as an investment structure: specifically, where an LLP holds property as an investment, then the income and gains are not exempt from tax when held by a pension scheme.

unit trust – including exempt property unit trust (EPUT)

Unit trusts are a collective investment structure where investors receive units (at the prevailing unit price) representing their investment in the fund.  The amount of income and capital due to investors is based on their number of units held.

Unit trusts can either be authorised or unauthorised.  Authorised unit trusts are regulated funds, offer investors protection under the Financial Services Compensation Scheme (FSCS), are open ended and are required to provide an element of liquidity to investors. Unauthorised unit trusts are not covered by the FSCS and will often be closed ended with limited liquidity.

Unauthorised unit trusts are often used to invest in property or limited partnerships, particularly for pension schemes or other tax exempt entities.  These are referred to as exempt property unit trusts or EPUTs.

open ended investment company (OEIC) or similar

These are similar to unit trusts but are set up as companies. Investors purchase shares, at the prevailing share price, and the company uses the proceeds to invest in accordance with its objectives and strategy. The amount of income and capital due to investors is based on the number of shares held.

To meet the FCA definition of an OEIC, the fund must be a body corporate, risk must be spread for investors across multiple assets and investors must be able to have a reasonable expectation of being able to redeem their shares within a reasonable amount of time.

Like unit trusts these can either be regulated or unregulated. If a fund is regulated by the FCA (or recognised by the FCA if it is located overseas) then it will offer investors protection under the Financial Services Compensation Scheme (FSCS) and be required to provide an element of liquidity to investors.

OEICs are often incorporated in tax exempt jurisdictions, so that investors will only pay tax on the income and capital that they actually receive.

investment trust

Investment trusts are a type of collective investment set up as closed ended public limited companies whose shares are traded on a recognised market. Standard investment trusts invest in the shares of other companies.  There are also Real Estate Investment Trusts (REITs) that invest in property.

public company

Investors will invest in the ordinary shares of a public company.  These are generally freely traded but unless the shares are regularly traded via a recognised market there may not be a willing purchaser.

The company will often be a trading company but it could be an investment trust or other investment vehicle that does not meet the definition of an OEIC

private company

Investors will generally invest in the ordinary shares of a private company.  Unlike public company shares these are not easy to sell especially as there may be restrictions set out in the company’s articles of association.

The company may be a trading company or it could be an investment vehicle that does not meet the definition of an OEIC.

corporate bond

This is where investors lend money to a company in return for a defined return over a set term. The return is often an interest return of a set percentage plus return of capital at the end of the term.  However this is not always the case as the return may be directly linked to underlying assets other than the return of the capital invested.

There will often be an element of security for investors in the form of a debenture or other security over one or more of the assets of the company.

unsecured loan

This is where investors make a loan to a company in return for a defined return over a set term. Like corporate bonds the return is often a set interest return (either payable during the term or at the end) plus return of capital at the end of the term.  However this is not always the case as the return may be directly linked to underlying assets other than the return of the capital invested.

The income and return of capital is dependent on the ability of the company to meet its liabilities after all secured debts have been met.

secured loan

This is just like an unsecured loan except that the loan is secured against one or more of the assets of the company.

protected cell company (PCC) or segregated portfolio company (SPC)

This is where a company is able to create ‘cells’ (segregated portfolios) each being distinct from each other. This means that within one company structure, separate cells can own different assets or properties and each is ring-fenced from the other (including income, expenses and liabilities).

The investor’s share is represented by shares in the PCC or SPC but attributed to a particular cell or portfolio representing the asset they are investing in. Typically PCCs and SPCs are established and based outside the UK.

limited liability company (LLC)

This is a form of private company, normally set up in the United States of America.

life assurance bond

This is a life insurance policy taken out by investors for the purposes of investment.  These will often be single premium policies and are often unitised.  These are often used for tax planning purposes and can be either be onshore or offshore depending on the needs or intentions of the investor.