UK Commercial Property and the use of JPUTs
A Jersey Property Unit Trust (JPUT) is a popular vehicle for acquiring and holding UK commercial real estate.
What is a JPUT?
A JPUT is a Jersey trust through which legal title to the trust fund (usually UK commercial real estate) is held usually by Jersey-based trustees.
The trustee holds the trust assets on trust for the benefit of unitholders in accordance with the terms of the trust.
The JPUT issues units to the unitholders like a company issues shares to its shareholders. The units are transferable, meaning the underlying property can be transferred indirectly by selling units in the JPUT.
The JPUT does not have a separate legal personality but contracts through its trustee, who may appoint investment advisors and property managers to assist with the day-to-day management.
The trustee must be a regulated professional trustee company in Jersey, and VALLA Limited would fulfil this role.
Unitholders are afforded the protection that the trustee must be regulated and is also subject to fiduciary duties under the Trusts (Jersey) Law 1984, including the duties to: (i) observe the utmost good faith and (ii) to exercise their powers only in the interest of the unitholders and in accordance with the terms of the trust.
The Finance Act 2019 (“FA2019”) and its impact on potential investors in UK commercial property.
Contained within the FA2019 were new measures, including the introduction of Capital Gains Tax (“CGT”) provisions, which impose a new CGT charge on non-resident individuals on the disposal of any UK commercial property. The Legislation also targeted “Property Rich”[1] companies and brought them within the proposed new CGT régime on the disposal of any interest in UK commercial property or disposal of any interests in entities within a structure classified as “Property Rich”.
In response to concerns within the industry that the proposed new rules would prevent future investment into the UK commercial property market, particularly by pension funds and sovereign wealth funds, a separate régime was implemented allowing certain types of entities, including JPUTs, to be treated as transparent for UK capital gains tax under a “transparency election”.
UK tax treatment of a JPUT under a transparency election
A transparency election for a JPUT, which requires unanimous consent of the unitholders, has the effect of preserving the tax neutrality of the JPUT by making it fully transparent for tax purposes and shifting the UK capital gains tax liability to each individual investor (unitholder) on their share of any disposal declared by the trustee.
Some specific language is drafted within the terms of the trust instrument to ensure that income from the trust accrues and belongs to the unitholders as it arises rather than forming part of the trust fund, thus ensuring the JPUT is regarded as transparent.
As a result, only the unitholders and not the JPUT are subject to UK income tax and capital gains tax, putting them in the same position as if they had invested directly in the property.
This UK tax transparency means that investing through a JPUT can avoid multiple levels of taxation on the disposal of UK commercial property and allows tax-exempt investors to preserve their tax treatment when investing either on their own or alongside investors that are subject to UK tax.
The sale of any units should not be subject to UK stamp duty land tax.
Jersey tax treatment of a JPUT
The Jersey tax treatment is as follows:
(i) No Jersey income tax or capital gains tax is payable by the trustee(s) provided no unitholder is a natural person who is a Jersey tax resident;
(ii) no Jersey withholding tax is applied on interest payments or distributions by the trustee(s) (assumes conditions stipulated in 1) above are met.
(iii) no stamp duty is payable on the transfer of any units.
Why Jersey?
Jersey has a long and distinguished track record of establishing and running structures that invest in UK property.
The JPUT is well established and very familiar to investors, advisors, and lenders involved in the UK commercial real estate market.
Furthermore, there are no Jersey law or regulatory restrictions on the ability of a JPUT trustee(s) to borrow, provide guarantees or security over the trust assets, or for unitholders to grant security over units in the unit trust or loans made by the unitholder. This makes the JPUT very suited to transactions involving third-party finance.
Benefits that Jersey has over other offshore jurisdictions include[2]:-
1. politically and financially stable – no direct Brexit impact on financial services products;
2. proactive adoption of developing global regulatory and tax standards;
3. frequently chosen by the global investor community for UK real estate investment;
4. Jersey is in the same time zone as London and is a 40-minute commute by air;
5. flexible legal and regulatory regimes and structures allow JPUTs to be tailored to meet the specific commercial requirements of investors;
6. tax transparent structures: essential for tax-exempt investors;
7. jurisdiction of genuine substance (recently EU “White Listed”);
8. EU and “rest of the world” market access without full AIFMD compliance costs, and
9. access to listing on the International Stock Exchange (also called TISE).
How can VALLA help?
VALLA, in partnership with approved advisors, can establish structures, make the necessary elections, acquire the UK commercial property and then manage and administer the structure daily.
Don't hesitate to contact us by email at grainne.mcginley@vallalimited.com, if you would like any further information or to discuss specific opportunities.
Disclaimer
This article summarises this subject and is provided for information only. It does not purport to give specific tax advice; professional advice should always be sought before acting. Whilst every care has been taken in producing this note, the author nor VALLA Limited shall not be liable for any errors, misprint or misrepresentation of any of the matters set out in it.
[1] Property Rich companies that fall within the scope of the new CGT/Corporation tax include non-resident individuals with an interest greater than 25% in an entity or have done within the previous 2 tax years from the date of disposal. CARE re related parties. Companies also fall within the definition of Property Rich companies where 75% or more of the value of the asset disposed of derives directly from UK Land.
[2] Information is taken from the Jersey Finance website.
The trustee holds the trust assets on trust for the benefit of unitholders in accordance with the terms of the trust.
The JPUT issues units to the unitholders in much the same way as a company issues shares to its shareholders. The units are themselves transferable, meaning the underlying property can be transferred indirectly by the sale of units in the JPUT.
The JPUT does not have a separate legal personality but contracts through its trustee, who may appoint investment advisors and property managers to assist with the day-to-day management.
The trustee must be a regulated professional trustee company in Jersey, and VALLA Limited would fulfil this role.
A transparency election for a JPUT, which requires unanimous consent of the unitholders, has the effect of preserving the tax neutrality of the JPUT by making it fully transparent for tax purposes and shifting the UK capital gains tax liability to each individual investor (unitholder) on their share of any disposal declared by the trustee.
