Tax Efficiency and Care Homes: A Guide to Capital Allowances
22 December 2023
News
The centre piece of the Autumn Statement was on full expensing policy. Initially introduced on a temporary basis in the Spring Budget of 2023, the policy was made permanent in the Autumn Statement.
Full Expensing allows companies subject to UK corporation tax to secure a 100% allowance when purchasing qualifying plant and machinery which is new and unused. It is a tax saving measure for many companies because the entire expenditure on the plant and machinery can be fully deducted from the company’s corporation tax bill. Notably, there is no upper limit on the cost of the eligible plant or machinery – so the more a company invests in equipment, the more it can deduct from its corporation tax liability.
For items which do not qualify for a 100% allowance, a 50% first-year allowance is available for expenditure on new special rate (including long life) assets, some of which are listed below.
However, businesses should beware that the Treasury will recoup the saving if the company disposes of the asset. For instance, if a company purchases a new item of machinery and deducts 100% of the cost from its corporation tax bill, and subsequently sells the asset for £20,000, it is obliged to incorporate £20,000 back into its taxable profits.
In our experience, full expensing, and other available capital allowance claims for care homes are frequently underestimated. This leads to businesses missing out on significant tax savings.
In this piece we consider how full expensing, and 50% first year capital allowance, can be used in the care home setting and the types of qualifying plant and machinery which could be eligible under the scheme.
Unfortunately, there is no list of what counts as qualifying plant and machinery and therefore it can be a time consuming exercise to identify which expenditure is eligible under the capital allowances regime. We know that many specialist items can be qualifying items but there are also ordinary items of expenditures which are not unique to care homes but are often overlooked, including:
Fixtures such as bathroom suites or kitchens;
Lifts;
Water and heating systems;
Hot and cold water systems;
Air conditioning units;
Lighting systems;
Electrical systems; and
Fire alarm and CCTV systems.
Within a care home settings there is specialist health and care equipment which also qualify, including:
Patient lifts and hoists;
Rehabilitation equipment;
Specialised beds and mattresses;
Safety equipment;
Medical gas systems; and
Alterations within buildings to install equipment.
These examples represent a range of specialist equipment that plays a crucial role in the care and well-being of residents in a care home setting.
There are several benefits to making sure your business makes a valid claim under the full expensing scheme or indeed other types of capital allowance scheme. Firstly there is an immediate ability to deduct your expenditure on the qualifying item from your corporation tax bill, contributing to overall tax efficiency. Additionally, ensuring that you properly account for your expenditure in your accounts is an important part of having a compliant tax return which stands up to scrutiny by the tax authorities.
Fearn v Tate named as top property case of 2023 by EG
22 December 2023
News
In their countdown of top 10 property law cases of 2023 EG awarded the Christmas number 1 spot to Fearn v Tate, calling it one of the most high-profile cases of the century.
Natasha Rees, Senior Partner at Forsters, was the lead lawyer advising the leaseholders, with Sarah Heatley, working with Tom Weekes KC and Richard Moules of Landmark Chambers.
Read more about the case, and Forsters’ involvement here and here.
Listen to the EG Property Podcast – top 10 property law cases of 2023 here.
The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries will often find themselves rowing against the tide between two very different and complex regimes.
With the right specialist advice, they can navigate the crossborder challenges safely and make the best use of planning opportunities. Understand the issues, avoid the traps, and discover ways to plan ahead in our Navigating the Atlantic series for US connected clients.
Gifting
In this instalment, we bust some of the common myths when it comes to gifting and compare the tax implications of gifting in the US and the UK.
Myth 1: Gifts to my spouse will always pass free of tax
It is a common misconception that gifts to spouses and civil partners are completely exempt from transfer taxes in both jurisdictions. However, such gifts may be taxable where there is a mismatch in the tax status of the donor (the person making the gift) and the donee (the person receiving the gift).
UK
In the UK, there is generally an unlimited exemption from inheritance tax (“IHT”) on gifts between spouses and civil partners. However, where assets pass from a UK domiciled (or deemed domiciled) spouse to a non-UK domiciled spouse, the exemption is limited to just £325,000. Gifts in excess of this will be subject to tax in the same way as gifts made to any other individual.
There is an option for the non-UK domiciled recipient spouse to elect to be treated as domiciled for IHT purposes (in order to access the unlimited exemption) but this would also have the effect of bringing their non-UK assets within the scope of IHT, which may not be desirable. This will need to be considered carefully, on a case-bycase basis.
US
In the US, there is also an unlimited marital deduction from gift and estate tax on transfers to spouses in most cases. However, this will not be available where the donee spouse is not a US citizen. In that scenario, tax-free transfers in lifetime are limited to $175,000 annually (in 2023). In order to access the marital deduction from estate tax on death, assets have to be left to the non-US spouse in a special type of marital trust, known as a “QDOT”.
Myth 2: Gifts to charity will always pass free of tax
UK
In the UK, in order for a gift to charity to qualify for the charitable exemption from IHT, the recipient entity must not only be operating for ‘charitable purposes’ (as defined in UK legislation), but it must also be registered as a charity in a country of the UK, EU or EEA. Critically, this means that a gift to a US charity will not qualify for the exemption, no matter how worthy the charitable cause. Lifetime transfers to non-qualifying charities can trigger immediate IHT charges (as well as charges to UK capital gains tax on assets gifted in specie, as discussed below).
US
While the US imposes equivalent geographical limitations for income tax purposes (i.e. a charitable gift must be made to a US organisation to qualify for relief), this limit does not apply for US estate tax purposes where charitable bequests are made by US citizens and domiciliaries. Non-US citizens/domiciliaries, however, must leave US situs property to a US organisation to qualify for the US estate tax charitable deduction.
Myth 3: Gifts of appreciated assets will not trigger capital gains tax
US
In the US, gratuitous transfers of appreciated assets will not constitute chargeable disposals for US income tax purposes – i.e. any in-built capital gain will not be crystallised on such transfers. Instead, the donor’s base cost in the assets will be “carried over” to the donee and will be used to compute the gains realised on the eventual disposal of the assets by them.
UK
One might assume that the same will be the case in the UK, but that assumption would be incorrect. In the UK, with certain limited exceptions, a gift of an asset will be a chargeable disposal for capital gains tax purposes. If chargeable gains are triggered in the UK but not in the US on the same event, this can give rise to a risk of double taxation because the mismatch in treatment can cause a loss of relief under the US-UK double tax treaty. Advice should be sought on aligning the treatment in both countries to maximise relief.
Myth 4: Gifts will always pass free of tax if I survive for seven years
UK
In the UK, outright lifetime gifts to individuals will generally be subject to the ‘potentially exempt transfer’ (“PET”) regime. This means they will pass out of the donor’s estate free of IHT if the donor survives the gift by seven years or more. If the donor survives the gift by more than three years but less than seven, the gifted sum will be subject to IHT on the donor’s death, but at a reduced rate. The PET regime can be extremely advantageous for individuals who can afford to make substantial lifetime gifts, as there are no limits on the amount that can be given away to the next generation taxfree under this regime.
US
However, those who are subject to US gift and estate tax will be limited in their lifetime giving, as there is no equivalent to the PET regime in the US. Instead, US citizens and domiciliaries are broadly limited to making annual gifts to (any number of) individuals of up to $17,000 (in 2023) and otherwise eating into their lifetime exclusion amount of $12.92 million. Gifts in excess of these amounts are typically subject to immediate US gift tax at a rate of 40%, which is likely to be prohibitive in most cases.
Myth 5: I can make gifts into trust up to the available US gift and estate tax lifetime exclusion amount without incurring tax
US
It is common planning for US citizens and domiciliaries to make substantial lifetime transfers of assets into trust. By doing so, they can potentially remove assets (and any future growth on those assets) from their estates for US estate tax purposes. Provided the value of the assets transferred falls within their lifetime exclusion amount for gift and estate tax, this can be done without triggering tax.
UK
By contrast, in the UK, transfers of assets into trust are immediately subject to IHT (subject to available exemptions or reliefs). IHT is charged at a rate of 20% to the extent that the value of the assets transferred exceeds the donor’s available ‘nil rate band’ of up to £325,000. This IHT charge will be “topped up” to a maximum of 40% in the event that the donor dies within five years of the transfer. For UK domiciled (or deemed domiciled) individuals, this will be relevant to transfers of any assets, worldwide. For non-UK domiciled individuals, this will apply to transfers of UK assets only. Where it is relevant, this IHT charge will generally prohibit lifetime planning using trusts.
Contact us
It is clear that gifting is an area that can cause significant difficulties for individuals with tax connections in the US and the UK. It is extremely important that advice is taken from advisors with an understanding of how the two legal systems interact; ideally before any action is taken.
Disclaimer
The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on USconnected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.
In the fourth episode of our Outside the Box podcast, we focus on the occupational requirements within the industrial and logistics sector. How has occupier demand changed during 2023 and, with an increasingly diverse occupier mix, is the industrial and logistics sector addressing the needs of occupiers? Paul Grayson, Senior Associate at Fosters chats to Tom Shaw, Director in the industrial and logistics occupier advisory team at Savills.
The overriding concern of the industry is that the government’s proposals will lead to even less housing being delivered – Victoria Du Croz quoted in the Financial Times
20 December 2023
Views
Planning Partner, Victoria Du Croz, has been quoted in the FT article entitled “Michael Gove insists he has not ‘abandoned’ local housing targets.”
Speaking on Tuesday 19 December, as the revised National Planning Policy Framework (NPPF) was published, Michael Gove said that local authorities will be given three months to deliver housing plans or face losing planning powers.
In the article, in which housing and property industry groups responded to Gove’s speech, Victoria du Croz, partner at Forsters said “The overriding concern of the industry is that the government’s proposals will lead to even less housing being delivered. The government has produced no convincing evidence to demonstrate how their reforms will deliver more housing.”
To read the full article (behind a paywall) please click here.
Forsters advises Fiera Real Estate UK and Wrenbridge on the acquisition of an urban logistics development site in Waltham Cross
15 December 2023
News
Forsters has advised Fiera Real Estate (“Fiera”) and Wrenbridge on the acquisition of a 2.6-acre site in Waltham Cross for the proposed development of a new 60,473 sq.ft. urban logistics scheme with a GDV of £25m.
The site was purchased through the Fiera Real Estate Logistics Development Fund UK (“FRELD”). All assets in FRELD’s portfolio will meet the rigorous environmental and social requirements set out by FRE UK’s Sustainable Design Brief, which align with its ambition to drive positive change and contribute to a low carbon economy. The scheme will have ESG considerations embedded at all stages of its design process and along with future projects for the fund, it will be targeting net-zero carbon construction, BREEAM Excellent and EPC A.
The site is situated off Britannia Road in Waltham Cross, which is a prime industrial location and two miles from junction 25 of the M25.
Chris Button, Head of Investment Management, UK at Fiera, said, “We are delighted to complete the acquisition of this prime logistics site in joint venture with leading developers Wrenbridge and ably advised, as always, by the magnificent team at Forsters.”
Harry Gibson, Associate Director at Wrenbridge, added: “This is our third deal locally and we look forward to preparing a planning application in the new year to be on site as soon as possible.”
Commercial Real Estate Partner, Jade Metcalf, led on the purchase, assisted by Senior Associates, Alexandra Ringrose and Daniel Steele, and Planning Associate, Sophie Smith. Property Litigation Partner, Ben Barrison, also advised on the deal.
Public Rights of Way: How to keep the curtains open without seeing dog walkers!
13 December 2023
News
When purchasing a property, it is important to ensure you are fully aware of any public rights of way crossing the property or near to it.
Those seeking peace and quiet in their new home will often want to ensure they are not besieged by local ramblers on the warpath.
Public rights can be divided into four categories
Footpaths (people on foot only)
Bridleways (people on foot, cyclists and horse riders)
Restricted byways (people on foot, cyclists, horse riders and any other transport without a motor)
Byways open to all traffic (people on foot, cyclists, horse riders, cars and any other transport with a motor)
There are exceptions for people in mobility scooters and powered wheelchairs.
A local authority and highways search obtained as part of the due diligence when purchasing a property should reveal any public rights of way crossing or abutting the Property. However, your solicitor should also enquire of the seller whether they are aware of any applications or pending submissions to add any public right of way to the definitive map or extend an existing public right of way which would abut and/or cross the Property.
The highways search will only reveal rights of way that are recorded as public rights of way at the date of the search result. Where a public right of way is shown on the local authority’s definitive map, that is conclusive evidence that it exists. However, definitive maps can be incomplete or not up to date which means that they are not conclusive evidence that no public right of way exists.
There are different ways in which new public rights can be created including (1) by express grant, (2) by order of a public authority, (3) dedication by the landowner and (4) presumed dedication.
Presumed dedication arises where the public at large have used a defined route for a 20 year period without permission from the landowner. Creating rights of way under presumed dedication is something that any purchaser should be mindful of when purchasing a property. Whilst the burden of proof is high for presumed dedication your solicitor should raise enquiries of the seller to determine if there has been any activity which could amount to presumed dedication.
What can you do to ensure the privacy of your home?
It is possible to:
Deposit a landowner statement under section 31(6) of the Highways Act 1980 with a map marking any ways across the property that the owner accepts are public rights of way and includes a declaration that the landowner does not intend to dedicate any new public rights of way across their property. This will “stop the clock” on the 20 year period and (unless the public can provide evidence to the contrary) any use of the property by members of the public during this period should prevent against new rights of way being established.
Apply to divert footpaths, bridleways and restricted byways provided certain requirements are met including that the diverted route is not substantially less convenient to the public. However, this can be a costly and drawn-out process especially if objections are raised. You should always get the right advice and, to avoid objections, ensure that any diversion benefits not only you but also members of the public.
Forsters can assist you with both these options and provide advice on public rights of way that currently affect your property or may affect a future property you are interested in purchasing.
Following a purchase, we always advise our clients to take active steps to ensure that no new rights of way are acquired which may include ensuring your boundaries are fenced, any gates specify that there is no public access, and you remain vigilant as to any members of the public gaining access to the Property.
Your term sheet sets out the fundamental terms of the commercial deal you have struck with your investor(s). Getting it in a shape that everyone is happy with will make for a much smoother execution of your funding round, allowing it to take less time so that you can get back to growing your business.
If you’re bootstrapping your way to an early round of funding, you may think twice about reaching out to an advisor to discuss your term sheet, perhaps wanting to hold off until it’s agreed commercially. I would, however, encourage you to reach out for an initial discussion before signing up to your term sheet, even if just for another perspective on what you’re signing up for.
So, what should a term sheet include?
Valuation
The valuation will set out how much of the equity is being given to the investor(s).
The term sheet may reference the “pre-money” value, being the amount the company is valued at before the funding round closes, and the “post-money” valuation, being the company’s value after (and including) the funding.
Whatever terminology is used, it’s important to understand what you’re agreeing to give to the investor, and whether this is on the basis of the issued share capital or the fully diluted share capital (such that the term sheet may say they’re receiving 10%, but actually, on an issued basis the investor may have more, having factored in the dilutive effects of convertible instruments such as options and warrants).
Option Pool
While the detailed terms of the incentive plan may come later after closing an early round of funding, the term sheet will often set out the percentage option pool to be made available to incentivise key staff. Founders should note how this percentage is calculated (will it dilute everybody or not?).
Investor Shares
The class of shares which investors will receive should have their key rights set out. Is everyone investing for ordinary shares, or will the investors receive preference shares with specific rights?
Preference shares in this context will typically have voting rights and have a priority return over the ordinary shares on a liquidation / exit event. If applicable, the term sheet should set out this priority return (known as a ‘liquidation preference’). It’s customary for investors of preference shares to have a 1* preference, meaning that they receive their investment back first. That said, in recent turbulent markets, there are instances of investors looking for more than this.
Whether they then participate or not in the balance of any proceeds should also be set out, noting that if they are non-participating (as is common), such that they only receive their liquidation preference, they will likely be convertible or entitled to the amount they’d receive had they been ordinary shares (therefore the preference affords the investor a downside protection).
Anti-Dilution
Investors often seek anti-dilution rights, which may include a ratchet such that, if there is a ‘down round’ in the future, the investors are issued more shares in line with that ratchet. Founders should ensure that the term sheet sets out the applicable type of ratchet, and that they understand what it means.
It’s customary for the ratchet to be what is known as a broad based weighted average ratchet.
Founder Vesting
Investors will expect to see good leaver and bad leaver concepts with a vesting schedule for shares held by founders setting out a founder’s entitlement if the founder leaves the company. We would encourage founders to discuss expectations here with the investors early to ensure alignment.
Board Composition
Including who will have a board seat and against what threshold is common. Boards are typically founder-led in their early stages with more board control given up in follow-on rounds as new investors come in and as independent directors are added.
Veto Rights
Investors will typically expect to have a set of investor veto matters, for which a percentage of the investor pool has to vote in favour for the company to action the matter. There may be shareholder matters and also investor director consent matters.
Founders may also wish to seek founder consent matters, although this is not always acceptable to investors.
Warranties
While the detail of the warranties (contractual promises to investors, e.g. that you’re not currently involved in any litigation) will be in the long form documents, we would encourage founders to consider who will be giving warranties and agree this and the overall liability cap upfront with their investors. Previously, founders often had to give warranties by reference to a salary multiple, however more recently the market has moved to having only the issuing company provide the warranties.
Share Transfers
The term sheet should include reference to certain share transfer matters, to the extent they are to apply. For example, pre-emption rights (and who they are for, e.g. everyone or certain investors), drag along rights and tag along rights (and what threshold triggers these rights) and co-sale rights.
Information Rights
While investors may be represented on the board, they will typically expect to have contractual information rights to enhance the limited information a shareholder in a UK company is typically entitled to see. Setting out what investors will receive, and whether this is for all investors or for those that hold a certain percentage of the equity, will allow you to be aware of the administrative burden of complying with this moving forwards.
SEIS / EIS Tax Reliefs
If the round is going to be raising money from investors looking to obtain SEIS/EIS relief this should be acknowledged, and the founders should take advice on what this is likely to mean in terms of structuring and process for them and what the investors may expect.
For more information about these tax reliefs, see here.
Finally, it’s worth being aware that the majority of the term sheet is typically not legally binding, although it may contain certain parts which are, for example, provisions relating to confidentiality and, if you’ve agreed this with your investor(s), exclusivity for a period of time.
Please get in touch if you would like to talk about your funding round and how we can team up to achieve your objectives.
Disclaimer
This note reflects the law as at 30 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
To Advise or Not to Advise? Timothy Evans and Olivia Longrigg write for Financial Remedies Journal
6 December 2023
Views
Family Associates, Timothy Evans and Olivia Longrigg, have written a piece for the Financial Remedies Journal providing commentary following the case of Lewis v Cunningtons Solicitors [2023] EWHC 822 (KB) which concerned a professional negligence claim against the claimant’s matrimonial solicitors.
In particular, the claim concerned a failure to advise in respect of a pension, which was the primary asset of value in the matrimonial proceedings.
The case provides guidance on the use of limited retainers and waiver letters, and also restates the jurisprudence surrounding a solicitor’s duty to advise. The article also raises questions as to procedural best practice in respect of pensions at an early stage of the retainer.
Timothy and Olivia highlight that:
Cunningtons had enough knowledge (absent full and frank disclosure) to know of the importance of and therefore advise upon the pension asset;
A public sector defined benefit scheme is one which should be a red flag for practitioners, as the attributable CE value is likely to be much less than the pension’s true worth;
Pensions remain one of the main potential sources of negligence litigation against family law solicitors. They are often an overlooked part of the divorce process, in part because of their complexity, in part because some clients do not want to engage with them and, sometimes, because in high net worth cases the pensions are dwarfed by other assets.
Podcast host Louise Irvine, and Owen Spencer, Counsel in Forsters’ Studios Group, were joined by Simon Calvert of CBRE to discuss film studio real estate.
The trio peer through the letterbox on the sector and give insights into the latest trends and likely developments in the film studio sector.
“Family Wars – lessons to be learned from conflicts” The Royal Gazette covers Nick Jacob’s STEP seminar
5 December 2023
Views
Private Client Partner, Nick Jacob, was invited to present a session at the recent STEP Bermuda Conference 2023. His session, entitled ‘Family Wars – lessons to be learned from conflicts’ has since been covered in an article by The Royal Gazette.
“No matter how big your business empire, or how tight your grip on it, you need a will and a succession plan. This was the sage advice from Nick Jacob” writes the editor.
The article highlights Nick’s top tips to avoid family conflict:
Facing up to potential conflict issues before they become real conflicts is absolutely critical.
Getting everybody in the family to buy in to the structuring and to understand why it has been set up is important.
Trust professionals must ensure that the structures they set up are not too complicated to understand.
Advisors need to think about whether what we are advising is right for the client. Are the structures going to work for that family, and are they dynamic enough to change in the future?
Parliamentary Launch of Resolution’s Vision for Family Justice: A Focus on Cohabitation Reform
5 December 2023
News
On Monday 27 November, Resolution hosted the launch of their Vision for Family Justice in Parliament.
The Vision, which sets out Resolution’s five key recommendations to improve family law/the family justice system, will provide a blueprint for Resolution’s campaigning activity ahead of the next general election and beyond. The Parliamentary launch focused on Resolution’s primary aspiration: to reform the law on cohabitation.
Jo Edwards, Chair of Resolution’s Family Law Reform Committee and Head of Family at Forsters, spoke at the launch about Resolution’s objective to provide a safety net for cohabiting couples on relationship breakdown or the death of their partner. Resolution’s polling ahead of its annual Awareness Week, which ran from 27 November to 1 December, found that 74% of cohabitees agree that ‘the current laws surrounding cohabitation are unfit for today’s modern society’. It also showed that 59% of the population believe cohabiting couples should have better legal protection (with a further 13% being undecided, rather than opposed).
The dramatic increase in cohabiting couples in the UK (over a 25-year period to 2021 there was a 144% increase, and cohabiting couples now represent around 1 in 5 families), makes unmarried couples the fastest growing relationship type in the UK. It was found in Resolution’s polling that 83% of the population expect these numbers to increase in the next decade. This huge growth in the numbers, coupled with people believing they are automatically protected as common law spouses (as Resolution’s polling showed), makes the lack of legal protection for cohabiting couples particularly concerning.
At the Parliamentary launch, both Grant Cameron (current Resolution National Chair) and Jo Edwards emphasised the need for cohabitation reform and the risk of England and Wales remaining a “curious outlier” if there is failure to implement change. She called for Parliamentarians and officials to work with Resolution to change the law on cohabitation to fit the needs of modern families.
Emily Thornberry, Shadow Attorney General, followed Jo Edwards in championing the need for cohabitation reform, acknowledging that the law as it stands is “extraordinarily unfair”. Married couples and civil partners are entitled to a fair and equitable settlement, but the law leaves no such protection for cohabitees. She emphasised that women are often, but not exclusively, the ones left disadvantaged at the end of a cohabiting relationship.
Ms Thornberry confirmed the Labour Party’s commitment to reforming the law for cohabiting couples. She expressed a desire to make this a cross-party initiative, in order to achieve change.
Siobhan Baillie, MP for Stroud, closed the speeches by committing to cross-party support for cohabitation reform, stating that she “warmly welcomes working together”. She concluded that there is plenty of evidence to support reform.
Forsters’ Family team supports Resolution’s reaffirmed commitment to cohabitation reform.
To read articles on the five key recommendations in Resolution’s Vision for Family Justice, see here:
Lifecycle of a Business – Demystifyng the Term Sheet
5 December 2023
News
Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.
Demystifyng the Term Sheet
You’ve considered your fundraising options, have all your records and documents in place and have an investor in mind, so now it’s time to consider the term sheet.
Your term sheet sets out the fundamental terms of the commercial deal you have struck with your investor(s). Getting it in a shape that everyone is happy with will make for a much smoother execution of your funding round, allowing it to take less time so that you can get back to growing your business.
If you’re bootstrapping your way to an early round of funding, you may think twice about reaching out to an advisor to discuss your term sheet, perhaps wanting to hold off until it’s agreed commercially. I would, however, encourage you to reach out for an initial discussion before signing up to your term sheet, even if just for another perspective on what you’re signing up for.
So, what should a term sheet include?
Valuation
The valuation will set out how much of the equity is being given to the investor(s).
The term sheet may reference the “pre-money” value, being the amount the company is valued at before the funding round closes, and the “post-money” valuation, being the company’s value after (and including) the funding.
Whatever terminology is used, it’s important to understand what you’re agreeing to give to the investor, and whether this is on the basis of the issued share capital or the fully diluted share capital (such that the term sheet may say they’re receiving 10%, but actually, on an issued basis the investor may have more, having factored in the dilutive effects of convertible instruments such as options and warrants).
Option Pool
While the detailed terms of the incentive plan may come later after closing an early round of funding, the term sheet will often set out the percentage option pool to be made available to incentivise key staff. Founders should note how this percentage is calculated (will it dilute everybody or not?).
Investor Shares
The class of shares which investors will receive should have their key rights set out. Is everyone investing for ordinary shares, or will the investors receive preference shares with specific rights?
Preference shares in this context will typically have voting rights and have a priority return over the ordinary shares on a liquidation / exit event. If applicable, the term sheet should set out this priority return (known as a ‘liquidation preference’). It’s customary for investors of preference shares to have a 1* preference, meaning that they receive their investment back first. That said, in recent turbulent markets, there are instances of investors looking for more than this.
Whether they then participate or not in the balance of any proceeds should also be set out, noting that if they are non-participating (as is common), such that they only receive their liquidation preference, they will likely be convertible or entitled to the amount they’d receive had they been ordinary shares (therefore the preference affords the investor a downside protection).
Anti-Dilution
Investors often seek anti-dilution rights, which may include a ratchet such that, if there is a ‘down round’ in the future, the investors are issued more shares in line with that ratchet. Founders should ensure that the term sheet sets out the applicable type of ratchet, and that they understand what it means.
It’s customary for the ratchet to be what is known as a broad based weighted average ratchet.
Founder Vesting
Investors will expect to see good leaver and bad leaver concepts with a vesting schedule for shares held by founders setting out a founder’s entitlement if the founder leaves the company. We would encourage founders to discuss expectations here with the investors early to ensure alignment.
Board Composition
Including who will have a board seat and against what threshold is common. Boards are typically founder-led in their early stages with more board control given up in follow-on rounds as new investors come in and as independent directors are added.
Veto Rights
Investors will typically expect to have a set of investor veto matters, for which a percentage of the investor pool has to vote in favour for the company to action the matter. There may be shareholder matters and also investor director consent matters.
Founders may also wish to seek founder consent matters, although this is not always acceptable to investors.
Warranties
While the detail of the warranties (contractual promises to investors, e.g. that you’re not currently involved in any litigation) will be in the long form documents, we would encourage founders to consider who will be giving warranties and agree this and the overall liability cap upfront with their investors. Previously, founders often had to give warranties by reference to a salary multiple, however more recently the market has moved to having only the issuing company provide the warranties.
Share Transfers
The term sheet should include reference to certain share transfer matters, to the extent they are to apply. For example, pre-emption rights (and who they are for, e.g. everyone or certain investors), drag along rights and tag along rights (and what threshold triggers these rights) and co-sale rights.
Information Rights
While investors may be represented on the board, they will typically expect to have contractual information rights to enhance the limited information a shareholder in a UK company is typically entitled to see. Setting out what investors will receive, and whether this is for all investors or for those that hold a certain percentage of the equity, will allow you to be aware of the administrative burden of complying with this moving forwards.
SEIS / EIS Tax Reliefs
If the round is going to be raising money from investors looking to obtain SEIS/EIS relief this should be acknowledged, and the founders should take advice on what this is likely to mean in terms of structuring and process for them and what the investors may expect.
For more information about these tax reliefs, see here.
Finally, it’s worth being aware that the majority of the term sheet is typically not legally binding, although it may contain certain parts which are, for example, provisions relating to confidentiality and, if you’ve agreed this with your investor(s), exclusivity for a period of time.
Please get in touch if you would like to talk about your funding round and how we can team up to achieve your objectives.
Disclaimer
This note reflects the law as at 30 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
Navigating the Evolving Landscape of Energy Efficiency Regulations in Real Estate
4 December 2023
Podcasts and videos
Listen in as we uncover the intricacies of global real estate decisions impacted by changing regulations with Edward Glass.
We explore critical topics such as minimum energy efficiency standards, energy performance certificates, and the rise of green lease clauses. Edward has been tracking the E in ESG closely since 2013-14, and his expertise shines as he discusses the change in the industry that EPC regulations have instigated and how Forsters is dedicated to sustainability.
We venture further into the financial implications of current and future regulations on real estate investments, emphasising the potential costs and risks for asset owners. We tackle the important question of how landlords should approach energy performance certificates, particularly with the looming necessity of capital expenditure to upgrade buildings to comply with future regulations. Listen in as we analyse the proposed uplift in minimum energy standards, its potential impact on the UK real estate, and strategies for budgeting for OPEX costs.
The episode concludes with an insightful look into the changing landscape of green lease clauses, data sharing, and its enforceability. Edward shares his observations on the evolving narrative for both landlords and tenants and key considerations when drafting leases. We discuss innovative approaches like the Chancery Lane Project, the challenges of enforcing sustainability clauses in the commercial sector, and the importance of a strong landlord-tenant relationship in the residential sector. So, tune in and equip yourself with knowledge about the changing regulations in real estate, whether you are a landlord, tenant, or investor.
Energy Efficiency Standards and Green Lease
Implications of Energy Performance Certificates
Changing Green Lease Clauses Landscape
Green Lease Clauses and Data Sharing
This podcast was recorded and first published by LifeProven. Read more here.
Resolution’s Fifth Vision: ‘Making Family Law Fit for Purpose’
1 December 2023
News
To celebrate Resolution’s 40th Anniversary, the organisation is using Awareness Week (27 November – 1 December) to launch their Vision for Family Justice. These recommendations from family justice professionals set out how the legal system can be improved to fit the needs of modern families. The fifth vision on Resolution’s agenda is ‘Making Family Law Fit for Purpose’.
Child arrangements on separation and divorce
One recommendation is for there to be a statutory requirement to hear the voice of the child at the first hearing in child arrangement proceedings. It was found in Resolution’s polling survey that 71% of people agreed that this recommendation “will help to overcome bias of the main carer”. The centrality of the child’s voice in proceedings is paramount and building a framework around this should be a key focus for future reform in the family justice system.
From April to June 2023, it was found that on average it took 47 weeks for private law cases to reach a final order (more than double the time taken in 2016). Delay can be damaging for the child and so Resolution has recommended a statutory time limit on child arrangement proceedings. They also advocate for streamlining cases by calling for early proactive management from experienced judges or an early and effective triage hearing.
Financial remedies on divorce
In the case of spousal maintenance, Resolution has recommended that the law, in the normal course of events, should make clear that it will be for a fixed term to avoid parties returning to court. However, this should not be limited in a way which would cause hardship to the financially weaker party.
Cases where assets exceed the parties’ needs, and where they were received by way of a gift or inheritance during the marriage, or acquired after the marriage, should be non-matrimonial property. Resolution sets out the instances where such a principle should not apply, for example, where that property is required to meet needs.
International cases
Since the UK’s departure from the EU, costs, delays and complexity for those divorcing, claiming maintenance and for international child cases have increased. There have been conflicting decisions for international families with connections to the UK and an EU member state, and also gaps left in domestic legislation.
Resolution champions the simplification of the legal framework in private family law cases between England and Wales, Northern Ireland and Scotland and calls for support from the EU to allow UK accession to the Lugano Convention.
Forsters’ Family practice supports Resolution’s proposal to improve the operation of the family justice system and calls on Parliament to facilitate making family law fit for purpose.
To see Resolution’s other recommendations, follow the links to our summary articles:
Cohabitation reform (find the link to our summary article here).
Helping families to find solutions (find the link to our summary article here).
Protecting the Vulnerable (find the link to our summary article here).
Ensuring the family courts meet the needs of families (find the link to our summary article here).
