Prepared by the Real Estate Investment Funds Team
As a politically stable and tax neutral jurisdiction with over 40 years accumulated experience as an international finance centre, Jersey has gained a strong reputation as a prime location in which to establish investment structures of all descriptions including a large number of property funds.
STAMP DUTY LAND TAX
Property unit trusts have recently become very popular as a result of changes in the UK legislation relating to stamp duty land tax ("SDLT"). Most transactions involving the transfer of an interest in land situated in the UK attract a charge to SDLT at a rate of up to 4% of the value of the property. On the introduction of SDLT, transfers of UK situated land to and from partnerships were expressly excluded from this tax.
The exemption from SDLT which applied to the transfer of interests in partnerships or to the transfer of property into a partnership was removed by the Finance Act 2004 and accordingly such transactions fall within the SDLT regime. However, transfers of units in offshore unit trusts which hold interests in land situated in the UK remain exempt from the SDLT regime.
This brief guide has been prepared by the Real Estate Investment Funds team at Carey Olsen for the purpose of giving clients and professional intermediaries a general overview of Jersey property unit trusts, now commonly referred to as JPUTs.
HOW THE EXEMPTION WORKS
Jersey unit trusts are increasingly used to hold interests in land situated in the United Kingdom as it is possible to transfer units in an offshore unit trust in a manner that exempts the transaction from SDLT. To qualify, it is necessary for the owner of the interest in land to be able to transfer in compliance with the relevant provisions of Section 64A of the UK Finance Act 2003.
To obtain the benefit of the exemption from SDLT, Section 64A requires three conditions to be met in respect of the initial property or property interest transfer to the Jersey unit trust:
- immediately before the acquisition of the property, there must be no units of the scheme in issue and there must be no assets held by the trustees for the purposes of the scheme;
- the issue of units in the scheme to the vendor must be the only consideration for the acquisition of the property; and
- immediately after the acquisition, the vendor must be the only unit holder of the unit trust scheme.
The unit trust scheme under Section 64A must be regarded as a collective investment scheme as defined by Section 235 of the Financial Services and Markets Act 2000. For these purposes it is necessary for the unit trust to have a minimum of two unitholders. This requirement is easily met by ensuring that a subsequent purchaser of the units uses two entities to acquire the units or by the use of nominee entities to hold units.
THE UNIT TRUST
The unit trust is a legal structure whereby legal ownership of the trust assets is vested in a trustee who holds these on trust for the benefit of the unitholders. Under Jersey law a unit trust must be constituted by a written instrument which sets out, in effect, the terms on which the trustee holds the trust assets for the unitholders.
The unit trust may be constituted with or without a manager. Where a manger is appointed its role will be to undertake the management and general administration of the trust.
Alternatively, this function can be undertaken directly by the trustee. In addition, where a property unit trust is concerned, it is usual for a property manager to be appointed by the trustee to manage the property and deal with matters such as tenant issues or rent collection.
Typically, trust instruments under Jersey law will contain provisions detailing the extent of the trustee’s powers and discretions, governing the appointment, removal or retirement of the trustee or regulating the issue, redemption and valuation of units.
The Jersey unit trust benefits from other tax advantages. It is transparent for UK income tax purposes so long as the trust qualifies as a "Baker Trust", which is to say that it contains provisions that ensure that the unit trust’s income is vested directly in the unitholders as it arises and does not form part of the trust fund. Also, where the trustee is located offshore and the unit trust is managed and controlled offshore, the trustee will be exempt from UK capital gains tax on the sale of UK property.
There are no taxes, registration fees or duties payable locally in respect of the establishment or administration of a unit trust. Where, as in most cases, the unitholders are not Jersey resident the trustee can take the benefit of a concession from the Jersey Comptroller of Income Tax which exempts the trust from any tax on income arising outside Jersey and from tax on any interest earned on bank and building society deposits within the Island. Distributions, for example of income, are paid gross to non Jersey resident unitholders. REGULATORY
Jersey unit trusts are regulated under the following legislation:
- the Control of Borrowing (Jersey) Order 1958 ("COBO")
- the Collective Investment Funds (Jersey) Law 1988 ("CIF Law"); and
- the Financial Services (Jersey) Law 1998 ("FS Law").
So far as property unit trusts are concerned the degree of regulation varies depending largely on the number of investors and their level of financial sophistication.
VERY PRIVATE UNIT TRUSTS
Consent to the establishment of a property unit trust must be obtained form the Jersey regulator, the Jersey Financial Services Commission (the "Commission"). This takes the form of a consent to the raising of money and issue of units under the COBO. A unit trust can be established as a very private unit trust where there are no more than 15 investor unitholders. For such structures the authorisation process has been streamlined and consent will usually be granted within two or three days. Details of beneficial owners are required to be disclosed to the Commission on a confidential basis.
These are regulated under the COBO. They include structures with an element of pooling of assets by a number of investors and where there is an offer to subscribe for units made to potential investors by by way of an offer document. Units must not be offered to more than 50 investors or listed on any stock exchange. The Commission will want to review the offering document but otherwise the regulatory policy is flexible. The Commission will require the trustee of a Jersey unit trust to have two Jersey resident directors on its board.
COLLECTIVE INVESTMENT FUNDS
The unit trust will be regulated under the CIF Law if units are to be offered to more than 50 investors or are to be listed on a stock exchange. Under the CIF Law, Jersey functionaries to the unit trust (for example the trustee or the manager) must obtain permits from the Commission.
Collective investment funds are categorised as either unclassified funds or as expert funds. Unclassified funds are subject to a higher level of regulatory scrutiny although today they are unusual in the context of property unit trusts.
For funds aimed at institutional and high net worth investors a new expert category of funds has recently been introduced. These also are regulated under the CIF Law. Expert Funds can be established on the basis of a self-certification approach without the requirement for any formal regulatory review of the fund or its promoter. There is a minimum investment level of US$100,000 and the Commission will issue permits within 3 days.
Although in relation to a unit trust constituted as an Expert Fund the Commission will require the trustee to have two Jersey resident directors on its board, there is no requirement to have a Jersey manager provided it has a separate Jersey based administrator where the fund is open ended. If the fund is closed-ended the trustee can perform the administration function. Investors are required to sign an investor warning and they have to fall within one of the prescribed "Expert Investor" categories. The regulatory approval process is speedy and has been substantially streamlined. The Commission will not impose any investment restrictions on such structures.
THE TRUSTEE OF THE JERSEY PROPERTY UNIT TRUST
Trust company business is regulated under the FS Law. Where the trustee of a unit trust is a professional corporate trustee it will have a registration under the FS Law. However, it is possible to establish a special purpose company to act as a private trustee company which, subject to meeting certain criteria, can take the advantage of an exemption from the requirement to register under the FS Law.
Before a Jersey unit trust can be established the trustee/administrator will need to identify the beneficial owners behind the structure and may need to obtain due diligence documents to meet its obligations under the Island’s anti-money laundering legislation.
CAREY OLSEN TEAM
The Carey Olsen team has substantial experience in setting up property unit trusts and advising purchasers, vendors, investors and finance parties. We have developed a set of template documentation to deal with all aspects of these transactions. Our action list and document list are available to clients and professional intermediaries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.