Regulatory Brief: Jersey Property Unit Trusts - Beyond Section 64A
Nick Kershaw from the Jersey office of law firm Ogier outlines the key attractions of using a JPUT for holding property, in addition to Section 64A.
There is widespread speculation that the seeding relief exemption from Stamp Duty Land Tax in Section 64A of the Finance Act 2003 will be removed
Section 64A has of course been a key driver for many transactions involving Jersey property unit trusts ("JPUTs") but there are other key attractions of using a JPUT for holding property in addition to Section 64A, and these are highlighted below.
A JPUT which is structured as a "Baker Trust" is recognised as being transparent for income tax so that for UK tax purposes income is treated as directly attributable to the unitholders and unitholders are able to set off expenses of the JPUT against that income.
Capital Gains Tax
For UK Capital Gains Tax purposes a JPUT is treated as a corporate and hence if it is managed and controlled offshore it can be possible to defer or avoid Capital Gains Tax.
No Stamp Duty
There is no stamp duty in the UK or Jersey applicable to the transfer of units in a JPUT. This contrasts with SDLT of 4% payable on the transfer of UK property and Stamp Duty Reserve Tax payable on the transfer of units in an English unit trust of 0.5%.
Tax Exempt in Jersey
A JPUT, provided it has no Jersey unitholders, will be exempt from taxation in Jersey (except for any Jersey source income, excluding bank deposit interest) and there will be no withholdings on distributions to unitholders.
Unlike an interest in a limited partnership, a unit in a JPUT is much more akin to a share in a company. It will commonly be evidenced by a certificate and is transferable in exactly the same way as a share in a company.
Transferring a limited partnership interest is a much more involved and difficult exercise. This makes a JPUT a much more liquid vehicle than a limited partnership, whilst at the same time being fiscally transparent.
For the purposes of the Jersey Security Interests Law, a unit in a JPUT falls within the definition of a "security" and hence can be secured in exactly the same way as a share in a Jersey company, including by way of possessory security where the secured party takes possession of the unit certificates, without the need to be entered on the register of unitholders.
This contrasts favourably with limited partnerships, where it is only possible
to take security by going on the register, with all the implications and potential liabilities that that may bring with it.
No Restrictive Statutory Framework
Unlike a Jersey company, a JPUT is not subject to a statutory framework (other than that which applies to trusts generally) and so for instance there is no prohibition on financial assistance, there are no maintenance of capital rules and there are no restrictions on distributions. Hence, it is possible to make distributions out of capital without the need to meet solvency or other tests and for the unit trust to give security for the indebtedness of unitholders without being subject to financial assistance type rules.
The lack of a restrictive statutory framework gives complete flexibility in terms of the structuring and operation of a JPUT, subject only to fiduciary type duties which would be applicable to any trust.
Joint Venture Vehicle
A JPUT is an effective vehicle for a joint venture type arrangement involving, for instance, an equity provider, a property manager and a lending bank. In particular, a JPUT can be structured with different classes of units so that the equity provider would receive normal investor units whilst the property manager would receive performance fee units giving it an entitlement to an enhanced return depending on performance of the JPUT.
An equity provider may wish in due course to introduce further investors and a JPUT provides an easy and effective structure to allow for this. In addition, for the reasons outlined above under "Taking Security", a JPUT is an effective vehicle to lend to and take security over.
Vehicle for Investment Funds
JPUTs are a well recognised vehicle for collective investment funds and there are a large number of JPUTs structured as investment funds. In particular, a JPUT is an excellent vehicle in which to acquire property with one or two initial investors with a view to introducing further investors in due course.
Unlike an interest in a limited partnership, a unit in a JPUT can easily be listed, and in particular there are a number of JPUTs listed on the London Stock Exchange and the Channel Island Stock Exchange ("CISX"). The CISX has now been given recognition by the UK FSA, Inland Revenue and the SEC and hence a JPUT which is listed on the CISX is an eligible investment for a large number of investors including SIPS and SAPS.
If a JPUT has less than 15 unitholders and does not issue an offer document, it can be established as a "very private unit trust" in Jersey which means that on provision of the names and addresses of the prospective unitholders, the requisite regulatory consents will be issued within two days and there will be no ongoing conditions attached to those consents.
If the JPUT is an investment fund, it can be established as a Jersey Expert Fund which provides for a simple, streamlined and fast regulatory approval process. A separate briefing on Jersey Expert Funds is available on request.
Special Purpose Trustee
It is possible to establish a special purpose company to act as trustee of a JPUT, and there is no requirement for a separate manager. As a special purpose company, the board of the trustee can be populated with directors nominated by the client and provided the trustee acts only as the trustee of the particular JPUT, it will be exempt from the legislation and codes of conduct applicable to professional trustees. Using this structure avoids the additional costs and complexity of having a separate management company.
Administration Experience in Jersey
There are a large number of JPUTs administered in Jersey and the Island has built up significant expertise in this area, providing for efficient administration of JPUTs. In particular, there are a number of people with property experience who are able to serve on the boards of the trustee/manager, thus assisting with the JPUT being treated as managed and controlled in Jersey.
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