UK Real Estate and Jersey Property Unit Trusts – Tax issues, Advantages and Regulatory Treatment

• Advantages of using JPUTs
  
  
• Trustees and the trust instrument
  
  
• Regulation and UK tax implications

A JPUT is a type of Jersey trust in which an asset or assets – most commonly UK real estate – is held by one or more trustees for the benefit of the holders of units in the JPUT under the terms of a trust instrument. A Jersey trust is not a legal entity in the same way as a company and the trustees are responsible for holding and managing the trust assets, although the management may be delegated.

Introduction

Jersey property unit trusts (“JPUTs”) remain a popular vehicle for investments into UK real estate assets. As with many offshore vehicles, they offer light touch regulatory treatment and tax neutrality, with potentially advantageous treatment under the UK’s income, capital gains, stamp duty and value added tax regimes.

A JPUT is a type of Jersey trust in which an asset or assets – most commonly UK real estate – is held by one or more trustees for the benefit of the holders of units in the JPUT under the terms of a trust instrument. A Jersey trust is not a legal entity in the same way as a company and the trustees are responsible for holding and managing the trust assets, although the management may be delegated.

Advantages of using JPUTs

Whilst some of the reasons why JPUTs initially became popular have changed, they remain a commonly-used structure for the following reasons:

• Track record: JPUTs are a well-established structure for UK real estate investments and are familiar to investors, lenders, advisers, regulators and tax authorities in the UK and elsewhere.
  
  
• JPUTs are highly flexible with the ability for the trust instrument (discussed below) governing the terms of the JPUT to be customised to suit commercial objectives.
  
  
• Tax neutrality: Income and capital gains taxes are not payable in Jersey by the JPUT trustees; stamp duty is not payable in Jersey or the UK on transfers of units in a JPUT; and JPUTs may be structured to be transparent for UK income tax purposes and may elect to be transparent for UK capital gains tax purposes (including in relation to the sale of the JPUT’s underlying assets).
  
  
• JPUTs are relatively easy and quick to establish with potentially light touch and fast regulatory approvals.

Trustees and the trust instrument

One or more Jersey corporate entities are usually appointed to act as trustees of the JPUT. For English law property and regulatory reasons it is common for two trustees, being Jersey-incorporated SPVs, to be appointed as trustees for the JPUT. Alternatively, a corporate trustee provided by a Jersey-domiciled trust and company service provider with expertise in real estate investments may fulfil this function.

The trustees owe certain fiduciary duties to the unitholders of the JPUT. A trust instrument setting out the terms on which the trustees hold the assets for the unitholders is required in order to constitute a JPUT (as well as initial trust property) . Jersey maintains a flexible and modern trust law regime which is well-suited to reflecting the commercial intentions of investors, and a rich book of jurisprudence in which established principles have been tested and clarified.
In some instances, the trustees may also appoint a manager to manage the property of the JPUT on behalf of the JPUT. This function can, however, also be undertaken directly by the trustees.

Regulation of JPUTs

JPUTs are subject to similar regulatory requirements as other investment vehicles in Jersey. Where they hold a single asset with a small number of investors, a simple regulatory consent under the Control of Borrowing (Jersey) Order 1958 (a “COBO consent”) is usually all that is required. COBO consents normally take around five business days to be obtained from the Jersey Financial Services Commission.

Where the JPUT will hold multiple assets but will have less than 50 investors, the Jersey Private Fund (“JPF”) regime may be suitable. JPFs are one of Jersey’s most popular Jersey fund authorisation regimes for sophisticated investors which utilises a fast-track, light-touch regulatory approval process to aid speed-to-market and limit costs of setup.

Similarly, a JPUT which will be offered to more than 50 investors and hold multiple assets will likely fall within the Collective Investment Fund regime in Jersey and would need to apply for a fund certificate on that basis.

UK Tax implications

In April 2019, the UK’s capital gains tax and corporation tax regimes were changed so that gains made by non-residents on direct and certain indirect disposals of UK commercial real estate are subject to UK capital gains tax. Fortunately, certain exemptions were introduced which remain relevant to the use of JPUTs:

• JPUTs can elect to be treated as transparent for any capital and corporation gains subject to certain conditions (including unanimous and irrevocable unitholder consent). Investors in JPUTs making such an election would be taxed in their own names on any gains made through the JPUT so that investors who are tax exempt can remain so, and double taxation will be avoided.
  
  
• In certain circumstances funds which are widely held and meet particular reporting requirements can elect for exemption from capital gains and corporation tax on the UK property gains. As above, individual investors would be taxed on gains made through the JPUT.

Confidentiality

Because JPUTs are not legal entities they are not required to file publicly-available information on the Jersey Companies Register. For this reason, the trust instrument (being the key constitutional document of a JPUT), the register of unitholders, and the consent issued by the JFSC, are not publicly available documents.

Other considerations

Investment into UK real estate through JPUTs is often by private acquisition of all of the units of a JPUT. The units are generally priced at net asset value taking into account any SDLT savings.

The holding of assets through the JPUT means that the commercial considerations around buying and selling units are similar to those around buying and selling shares in a private property company. In practical terms, an investment or transfer will be approved by the trustees (and potentially the manager if there is one) on the terms of the trust instrument and on the trustees clearing AML checks on each new investor. An investor into a JPUT would equally need to conduct due diligence on the JPUT itself as well as the underlying assets.

Lenders to JPUTs or the JPUT’s investors will typically require a security package including a Jersey law security interest over the units in the JPUT and one or more direct UK charges over the underlying property. For this reason, JPUT trust instruments generally contain provisions which permit the trustees of a JPUT to provide security (although this may be subject to certain conditions being met). The lender may also require other security, such as an English law debenture over the JPUT’s assets in the UK and security over the JPUT’s revenue which may be by way of security over the JPUT’s bank accounts (and, subject to the terms of the JPUT trust instrument, care must be taken here to obtain unitholder consent if the JPUT has been structured as a Baker trust). Such lending will typically be conditional upon the lender being satisfied that the JPUT has all relevant corporate and regulatory consents and that the trust instrument contains provisions protecting the lender’s position as secured party.