Jersey property unit trusts13 Mar 2019
Jersey property unit trusts (or "JPUTs") are a well-established and popular choice as an offshore investment holding vehicle for real estate. Changes to the taxation of gains on UK property held by non-resident investors have generated renewed interest in JPUTs as being, for some, the ideal holding vehicle for UK real estate. This briefing provides a refresher on the fundamental characteristics and advantages of a JPUT.
JPUTs and UK tax
JPUTs have been a popular holding vehicle for UK property for many years. With effect from April 2019, changes to the UK tax regime mean that non-residents are subject to UK tax on capital gains made on all types of UK property. Our view is that JPUTs remain a suitable vehicle for holding UK property in light of those changes, and indeed may now be the vehicle of choice for many investors. Relevant tax considerations are as follows:
- a JPUT can be structured to be income tax transparent for UK income tax purposes. This can enable investors with different tax treatments (for example, tax exempt investors, such as pension funds, and tax-paying investors, or including both non-UK and UK-based investors) to jointly participate through the same vehicle, without suffering any tax disadvantage that might otherwise arise from co-investing with different types of investor (the transparency meaning that each investor is taxed in accordance with their own tax treatment);
- from 6 April 2019, a JPUT can, with the consent of all unitholders, elect to be transparent for UK capital gains tax purposes, also facilitating co-investment by different types of investors without any double taxation or loss of tax exemptions as a result of the tax status of the co-investment vehicle;
- JPUTs may also be used as part of groups of entities owned by collective investment vehicles (CIVs) which have made the exemption election in respect of UK capital gains, with JPUTs potentially offering optionality in being potentially equally attractive as a holding vehicle to buyers who would prefer a tax transparent vehicle as well as those who have themselves made the exemption election for capital gains tax purposes;
- a transfer of units in a JPUT, provided the register of unitholders is located in Jersey, and the JPUT qualifies as a "collective investment scheme" under UK law, such that the JPUT is deemed to be a company, will not attract a charge to UK SDLT and will ordinarily be exempt from UK Stamp Duty Reserve Tax and UK Stamp Duty;
- a JPUT structure can avail of the Non-Resident Landlord Scheme allowing rent to be collected gross, without the deduction of income tax at source by the tenant.
An overview of JPUTs
What is a JPUT?
A JPUT is a unit trust established under the Trusts (Jersey) Law 1984, as amended (the "Trusts Law") which holds real estate as the primary asset of the unit trust. As with any trust, a JPUT is not a separate legal entity in its own right and acts through one or more trustees (or, in certain cases, by one or more trustees and a separate manager) who hold legal title to the property in the trust (the real estate) and administer the JPUT in accordance with the terms of the trust instrument and the Trusts Law. The unitholders are entitled to the benefits from such property in accordance with the terms of the trust instrument.
Save in limited circumstances, there is no Jersey regulatory requirement for a JPUT to have a separate manager. However, a manager is sometimes appointed where there is a desire to separate the 'custodial' functions of a trustee from the 'management' of the activities of the JPUT – this is more often seen in investment fund structures. The role of a JPUT manager is distinct and separate from that of a property/asset manager who is appointed to oversee the day-to-day management of the property held in the JPUT (e.g. dealing with landlord and tenant relations, general maintenance of the property, insurance and rent collection aspects).
Who owns the JPUT assets?
One or more trustees of a JPUT directly or indirectly hold legal title to the property of the JPUT for the benefit of the unitholders of the JPUT, under the terms of the trust instrument. Each unitholder in a JPUT has an undivided beneficial interest in the property of the JPUT with each unit having the rights set out in the trust instrument.
JPUTs established for the purpose of acquiring UK real estate are often established by two trustees who hold legal title to such property jointly on trust for the unitholders. Under English property law, if at least two trustees convey legal estate to a buyer in good faith for valuable consideration and give a receipt for the money received, then the buyer receives clean title to the property free from any equitable interests that might otherwise be asserted in respect of the property (a concept known as "overreaching"). The same result can also be achieved by having a single trustee and a nominee (holding the property on trust for the trustee) or by two nominees (holding the property on trust for the trustee).
When is a JPUT formed?
A JPUT comes into existence when one or more trustees hold or has vested in them or are deemed to hold or have vested in them property (of which they are not the owner in their own right) for the benefit of one or more unitholders under the terms of a trust instrument.
What assets can a JPUT hold?
Any form of property may be transferred to or vested in a trustee in order to establish a JPUT. Often initial nominal cash funds are transferred to a trustee to establish the JPUT, with further property (the real estate) being contributed later, in each case in return for the issue of units in the JPUT.
The Trusts Law provides a flexible statutory framework which allows considerable freedom to tailor the governing terms of a JPUT within the trust instrument. A JPUT trust instrument usually contains provisions relating to (i) the issue, transfer, redemption and valuation of units; (ii) the return of income and capital in respect of the trust property; (iii) the powers, discretions and responsibilities of the trustee (and any manager); (iv) the procedure to remove and appoint trustees (and any manager); and (v) the holding of meetings and passing of resolutions by the unitholders in the JPUT.
Commonly, in order for a JPUT to be deemed to be transparent for UK income tax purposes, trust instruments contain specific wording to ensure that income from the property of the JPUT vests directly in the JPUT unitholders as it arises, less expenses of the JPUT, and that this income does not form part of the trust fund. This avoids any potential double layer of taxation at both the level of the JPUT unitholders and at the JPUT level. JPUTs that contain such provisions are referred to as "Baker Trusts" following the English case of Baker v Archer Shee  AC 844. Alternatively, the trust instruments may contain provisions requiring the trustees to accumulate funds, with the unitholders having a right to compel the trustees to pay the balance of the income to the unitholders. Trusts that contain such provisions in their trust instrument are referred to as accumulation or "Garland Trusts" following the English case of Archer Shee v Garland  AC 212.
Regulation of JPUTs
The prior consent of the Jersey Financial Services Commission (the "Commission") is required to permit the issue of any unit(s) in a JPUT. For JPUTs this consent can normally be obtained from the Commission within a period of 5 working days. Additional Jersey regulatory consents will be required in respect of JPUTs that are widely-held collective investment funds. For further details in relation to investment funds, please see our briefing "Jersey investment funds: an overview".
Regulation of JPUT trustees and managers
Trustee(s) and manager(s) who are directly regulated by the Commission in the provision of their services can be appointed to manage the JPUT. It is also possible for special purpose entities that are exempt from registration under the Financial Services (Jersey) Law 1998, as amended, to fulfil such roles, provided those special purpose vehicles are, themselves, administered by a third party administrator who is regulated by the Commission.
The use of special purpose managing trustees offers a number of advantages. These include:
- the ability, subject to tax and regulatory advice, for the client to own the entire issued share capital of the trustees and thus to grant security interests over such shares (alternatively, such entities can be owned by a charitable trust, a non–charitable purpose trust or a foundation);
- the ability, subject to tax advice, for the unitholders to appoint their own representative directors to the board of the trustees, allowing greater control over their actions;
- lower execution risk on a financing (as such entities may have no other business which may be put at risk, unlike a regulated trustee);
- the avoidance of any 'contagion risk' in respect of defaults by other JPUTs of which the regulated trustee is also trustee, and the avoidance of protracted negotiation of limited recourse and non-petition provisions as usually required by a professional trustee; and
- if a change of administration of the trustee is required (most often on a sale of all of the units in a JPUT), all of the shares in the trustee can also be transferred so as not to require the transfer of the assets and contracts in relation to the trust assets to a new trustee.
Advantages of a JPUT
Some of the main benefits in using a JPUT are summarised below:
- recognised structure – JPUTs are well known, tested and familiar to investors and advisers and recognised and accepted by lenders in the UK and elsewhere;
- JPUT expertise – there is a long history of the formation and administration of JPUTs in Jersey, and sponsors and investors can thus call upon significant legal and administrative expertise in relation to the establishment and administration of JPUTs;
- flexibility of the Trusts Law –JPUTs are almost exclusively regulated under the terms of their trust instruments, which can be tailored to meet operational and commercial requirements. There is no prohibition or restriction as regards the maintenance of capital, the provision of financial assistance or in the making of, or source of payment for, distributions or unit redemptions, i.e. no formal solvency statements are required to be declared by the trustees before such actions can take place. Unless the terms of a trust instrument provide otherwise, the JPUT may continue for an unlimited period. It is also a well-established principle of Jersey law that where all of the unitholders are of full age, have capacity and are together absolutely entitled to all of the trust assets, they can require the trustees to follow their directions irrespective of the terms of the trust instrument;
- flexible investment vehicle - a JPUT can be structured as either: (a) a private non-fund JPUT (typically, where a single asset is held or the JPUT does not operate on the principle of risk spreading); (b) a Jersey private fund where the number of investors does not exceed 50 persons (with each investor being a 'professional investor' or an 'eligible investor'); or (c) certain types of collective investment fund (where (i) units are offered to more than 50 persons or are to be listed within one year of the offer and (ii) the JPUT is open-ended or is operated on the principle of risk spreading);
- ability to exert control over the JPUT - unitholders or a promoter may exert control over the JPUT in a number of ways including (i) by way of appointing a manager to the JPUT which is owned by them, (ii) appointing one or more directors to the board of an SPV trustee, (iii) including reserved matters in the trust instrument that require the consent of all or a specified majority of unitholders in the trust instrument and/or (iv) including the requirement for advisory committee approval before certain actions are taken by the JPUT trustees;
- ability for specific rights to attach to units in the JPUT - there are no restrictions on the number or type of classes of units that may be issued or the percentage interests of unitholders in the JPUT. Having different classes of units in a JPUT can enable different unitholders (which may include the investment manager or promoter) to receive different returns (for example, including a performance element) based on the class of units, or to have different voting rights;
- no limitation on borrowing, distribution policy or trust assets - there are no limits on gearing or any requirements to distribute certain profits within any particular period or any concentration restrictions as to the composition of the real estate held under the terms of the JPUT, i.e. a JPUT may hold a single property;
- ability to grant security - security can be granted over units in a JPUT and, subject to the terms of the trust instrument or with the approval of all of the unitholders of the JPUT, the trustees of the JPUT are able to borrow, give guarantees or indemnities and grant security over the trust assets and over the income of the trust;
- use within multi-layered structures - a JPUT can be used within layered structures either as a number of JPUTs or in combination with other structures (such as a limited partnership);
- statutory and fiduciary obligations of trustees - the Trusts Law requires trustees to act with due diligence to the best of the trustees' ability and skill. Trustees must also observe the utmost good faith;
- low regulatory fees – save for a payment required to obtain consent to issue units on the establishment of a JPUT, there are no statutory fees or duties payable to any Jersey regulatory authority on the establishment of a JPUT, or on the issue, transfer or redemption of units in a JPUT and no annual registration charges are payable, unless the JPUT is a collective investment fund;
- no auditing requirement – generally there is no requirement for a JPUT to appoint an auditor or to produce audited accounts, although if an audit is desired then a requirement to that effect can be stipulated in the trust instrument;
- privacy - there are no public disclosure requirements in Jersey in relation to the JPUT or its unitholders. The trust instrument of the JPUT, the register of unitholders of the Unit Trust and the regulatory consent issued by the Commission in relation to the JPUT are not required to be made publically available;
- ability to list - units in a JPUT may be listed on a stock exchange, including on The International Stock Exchange ("TISE") in the Channel Islands. TISE is deemed a recognised stock exchange and listing venue by HMRC under section 1005 of the Income Tax Act (2007), allowing investment by Self- Invested Personal Pensions (SIPPs) and Individual Savings Accounts (ISAs). TISE is also recognised by the US Securities and Exchange Commission (SEC), the Australian Stock Exchange (ASX) and the German regulator, BaFin, meaning that JPUT units can be automatically eligible assets as part of an institutions 'listed' investment allocation;
- simplicity and ease of investing/divesting in/out of the JPUT – the subscription for, transfer and redemption of units in a JPUT is straightforward, as is effecting a sale of units in a JPUT; and
- ease of winding-up - there are no prescribed statutory procedures or timing requirements or creditor notifications required in relation to the winding-up of a JPUT. The only public filing in relation to the winding-up of a JPUT is a prescribed form to notify the Commission of the revocation of the consent issued by the Commission in relation to the issue of units. Unless required by the trust instrument, there is no requirement to appoint a liquidator to wind-up a JPUT's affairs. Under the Trusts Law, the property of the JPUT is insulated from any claim by a creditor of a trustee (in its personal capacity) upon the insolvency of that trustee or upon distraint, execution or similar process being levied against that trustee's personal property, save to the extent that the trustee has a claim against the JPUT or has a beneficial interest in the JPUT.