KEY TAKEAWAYS
Amongst such benefits are the "light touch" regulatory environment in Jersey, potential stamp duty savings and tax transparency, an ability to obtain greater liquidity (for example, by listing on the Channel Islands Stock Exchange) and to spread the risk of the investment, as well as potentially advantageous treatment under the UK's income, capital gains, inheritance and value added tax regimes. Using a Jersey investment structure can also benefit investors by providing the ability to manage the property investment vehicle without suffering any local income tax or deductions for withholding.
A unit trust is not a separate legal entity as such, but a trust arrangement whereby legal ownership of the fund's assets is vested in a trustee who holds, or trustees who hold, the assets of the fund on trust for the benefit of the unit-holders. For most practical purposes, a unit trust scheme will operate and be regulated in the same manner as a corporate investment fund.
The unit trust will generally be constituted by means of a trust instrument made between the trustees or between the trustees and an independent manager. In the former case, the trustees are generally responsible for promoting, managing and administering the unit trust scheme, or for appointing a manager or other adviser to do so. In the latter case, the manager will generally promote, manage and administer the scheme, and the trustees will generally supervise compliance by the manager with its obligations under the trust instrument. Subscription proceeds will be paid to the trustees which will act as custodian of the investment assets of the fund.
The trust instrument will generally contain provisions regulating the issue, redemption and valuation of units, the appointment and removal of the trustees and the manager or any delegates, the duties, remuneration and borrowing powers of the trustees, investment restrictions and for the winding-up of the trust.
Increased competitive pressures on arrangers resulted in Jersey investment structures, such as Jersey property unit trusts ("JPUTs"), being used more frequently in the recent past in commercial property transactions, particularly in connection with tax planning.
A significant number of UK property transactions (particularly commercial property sales) are structured as property transfers to newly established JPUTs or their subsidiaries (for example, by contribution of a property, or a portfolio of properties, to the JPUT or its subsidiary in return for the issue to the contributor of units in the JPUT).
On its establishment, a JPUT requires the appropriate consents under the Control of Borrowing (Jersey) Order 1958 regulating the raising of money and issue of, inter alia, units in the JPUT.
If the vehicle is a private investment vehicle, obtaining such consents is normally a formality but information on the beneficial owners needs to be provided on a strictly confidential basis to the Jersey Financial Services Commission (the "Commission").
If the vehicle is to be a collective investment fund that is offered to a larger number of investors (rather than a non-fund investment vehicle or a Jersey private fund), then, in determining whether the requisite consents will be granted, the Commission will have taken into account the stature and investment management expertise of the promoter and the levels of protection afforded to investors. The substance of any offering document also requires the approval of the Commission and they may also wish to review other principal documentation.
JPUTs can be established and operated as tax neutral vehicles. Income and capital gains taxes are not payable in Jersey by the JPUT trustees 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).
Where UK property is currently held through a JPUT, as an alternative to arranging for a conveyance of the property, we understand that units in the JPUT may be transferred to a third party purchaser without incurring any charge to Stamp Duty Land Tax ("SDLT"). In contrast, on a direct sale of the property by conveyance, we understand that SDLT would be chargeable at rates of up to 5% (plus VAT) on commercial property. The savings to a purchaser will normally be reflected in the sale price.
We understand, further, that using a Jersey unit trust as against an English unit trust provides additional benefit in avoiding the necessity to pay Stamp Duty on the transfer of units at the rate of 1%. Hence, by initially transferring property into a JPUT, then selling the units in the JPUT, we understand that significant stamp duty savings can be made on transfers of UK property.
In addition, an offshore fund of this nature may be capable of being more widely marketed, to institutional investors, for example, and may be listed on an offshore exchange (for example, the Channel Islands Stock Exchange – which is a recognised stock exchange for HM Customs & Revenue purposes) to facilitate this.
Investment into UK real estate via JPUTs is generally by private (whether by equity or debt funding) acquisition of all of the issued units of a JPUT. Units in a JPUT are usually priced at net asset value, and the acquisition price usually takes account of any SDLT savings.
For commercial and risk management purposes, buying units in a JPUT is similar to buying shares in a private property company. Instead of trading the underlying property, the units in the JPUT are themselves sold to the new investor. In practical terms, the trustees (and the manager, if there is one) will approve the transfer of the units to the investor, in accordance with the JPUT trust instrument, on receipt of a validly executed transfer instrument (and any other documentation required under the terms of the JPUT trust instrument) and on satisfaction of due diligence by the trustees (for anti-money-laundering purposes) on the new investor.
Incoming investors are well-advised to undertake all of the usual property due diligence (whether by production of certificates of title or otherwise), as well as carrying out due diligence on the unit trust itself and its establishment (although this is generally a lesser burden than that required before purchasing shares in a private company).
Banks lending to JPUTs to fund property acquisition, or to unit-holders to fund the acquisition of the units, will typically request a security package that consists of a Jersey law security interest over the units in the JPUT themselves, and a direct UK charge, or direct charges, over the UK property held directly or indirectly by the JPUT.
Unit trust instruments generally contain provisions which permit the trustees of a JPUT to provide third party security in support of a unit-holder's borrowing, provided certain conditions are met.
Banks will often request additional security, and may request general security over the JPUT's assets (usually by way of English law debenture over the JPUT's assets situate in the UK) and/or security over the JPUT's revenue stream (ie rental income) which, if not covered by a debenture, can generally be dealt with by way of a Jersey security granted by the trustees over the JPUT's rent account.
Care will also be taken by the bank's Jersey advisers to ensure that the JPUT has all the regulatory consents required, has been properly established and that the JPUT trust instrument contains provisions protecting the bank's position as secured party.
Estimates vary, but the more conservative put the total value of commercial property that has migrated into JPUTs at somewhere in the region of £50 billion, creating a significant pool of UK commercial property held offshore in which to invest. The main advantages being that:
Key Contacts
Partner, Walkers (CI) LP
Jersey
Managing Partner
Jersey
