Introduction
Jersey Property Unit Trusts ('JPUTs') have been used extensively as a vehicle to acquire and hold UK property. Whilst previously the key driver for this was the seeding relief exemption from UK Stamp Duty Land Tax ('SDLT'), which the Chancellor abolished in his 2006 Budget, there are other key attractions of a JPUT. This article summarises the key benefits of a JPUT, and outlines the regulatory framework in Jersey for the establishment of a JPUT.
Key Benefits Of A JPUT
Fiscal Transparency
A prime attraction of a JPUT is that it can be structured as a 'Baker Trust', which is recognised as being transparent for income tax so that for UK tax purposes income is treated as directly attributable to the unit holders. Unit holders 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 entity 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 unit holders, 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 unit holders.
Liquidity
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.
Taking Security
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 unit holders. 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 this 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 unit holders 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' above, 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.
Listing
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 Financial Services Authority ('FSA'), Her Majesty's Commissioners of Revenue and Customs ('HRMC') and the US Securities and Exchange Commission ('SEC') and hence a JPUT which is listed on the CISX is an eligible investment for a large number of investors including SIPPS and SAPS.
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 (see 'Financial Services Law' below). 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.
Regulation in Jersey
There are three main pieces of legislation relevant to the regulation of a JPUT, namely the Control of Borrowing (Jersey) Order 1958 ('COBO legislation'), the Collective Investment Funds (Jersey) Law 1988 ('CIF Law') and the Financial Services (Jersey) Law 1998 ('FS Law'). The level of regulatory intervention in Jersey is, broadly speaking, dictated by the number and type of investors, and can be divided into five levels.
Very Private Unit Trusts
On its establishment, a JPUT will require a consent from the Jersey Financial Services Commission (the 'Commission') to the raising of money and issue of units under the COBO legislation. For a simple investment holding or joint venture arrangement with no more than 15 investors, obtaining such consent is normally a formality taking a couple of days to process, subject to the disclosure to the Commission (on a non-public, confidential basis) of details in relation to ultimate beneficial ownership. There will be no regulatory intervention in document review and no ongoing monitoring.
'COBO only Funds'
'COBO only Funds' are regulated under the COBO legislation. This type of structure is applicable where the arrangement involves an element of pooling of funds by more than one investor and units in the JPUT are offered to potential investors by or on behalf of the JPUT by way of an offer document and/or there are more than 15 investors. For this type of arrangement, provided the units in the JPUT are not to be offered to more than 50 investors or listed on any stock exchange, the Commission will only review the offering document and the regulatory policy is flexible. The Commission will require the trustee of such a JPUT to have two Jersey resident directors on its board and may require the JPUT to have a Jersey manager. The Commission will also wish to be satisfied as to the stature of the promoter.
Collective Investment Funds
The CIF Law and the FS Law will apply if units in the JPUT are to be offered to more than 50 investors or are to be listed on a stock exchange. Under the CIF Law, the trustee, on behalf of the JPUT, must obtain a certificate from the Commission. For Non-Expert Funds (as to which, see below), a certificate will not be granted until the Commission is satisfied with the stature of the promoter and the structure and the documentation of the JPUT itself. The Commission will again require the trustee of such a JPUT to have two Jersey resident directors on its board and will furthermore require the JPUT to have a Jersey manager. In addition, the Commission will place conditions on the certificate it issues to the trustee on behalf of the JPUT so as to facilitate ongoing monitoring. The authorisation process generally takes four to six weeks. In addition, if the fund is open-ended, the Guide to Open-Ended Unclassified Collective Investment Funds will apply which sets out certain documentary and structural requirements in relation to the JPUT.
Under the FS Law, Jersey functionaries to the JPUT will be required to be authorised by the Commission for the conduct of funds service business. If a functionary to the JPUT has already been so authorised in respect of a similar function for a different fund, such functionary need only notify the Commission of its intent to perform such function in respect of the JPUT and no further authorisation is required.
Expert Funds
For JPUT funds aimed at institutional and high net worth investors an Expert Fund can be established within a matter of days on the basis of a self-certification approach without the requirement for any formal regulatory review of the fund or its promoter. An Expert Fund is subject to a very light degree of regulation. In particular, an Expert Fund is not required to adopt any prescribed investment or borrowing restrictions or risk diversification strategy and the requisite certificates and authorisations to the establishment of the fund will be issued within a matter of days.
As with 'COBO only' Funds and Collective Investment Funds, the Commission will require the trustee to have two Jersey resident directors on its board but it will not require the JPUT to have a Jersey manager so long as (for an open ended fund) it has a separate Jersey based administrator or (for a closed ended-fund) the trustee fulfils this function. Each investor is required to sign an investor warning and must fall within one of the prescribed 'Expert Investor' categories. Subject to such requirements being met, the application process is fast, flexible and streamlined. For further information on Jersey Expert Funds please refer to our client briefing on this subject.
Unregulated Funds
For JPUTs which are either:
- closed ended funds listed on a specified exchange or market or which have applied for their units to be granted such a listing; or
- aimed at investors who will make a minimum initial investment of US$1 million, or the currency equivalent, or are an institutional or professional investor;
a new category of Unregulated Funds has been introduced in Jersey with effect from February 2008.
An Unregulated Fund is subject to no regulatory review or oversight of its terms or conduct. In order to claim exemption as an Unregulated Fund a completed notice must be filed with the Jersey Registrar of Companies. The offer and/or listing document of an Unregulated Fund needs to contain a prominent statement that the fund is unregulated together with a prescribed form of investment warning and may be offered to investors immediately following the filing of the prescribed notice.
Financial Services Law
The FS Law regulates trust company business and requires those carrying on trust company business to be registered under the FS Law and to comply with the Trust Company Business Codes of Practice issued pursuant to the FS Law. Where the trustee of a JPUT is a professional trustee company it will have such a registration. This does not mean that a JPUT is obliged to use a professional trustee. The FS Law specifically exempts a private trustee company from being required to register under the FS Law provided it meets certain conditions. Consequently, the trustee of a JPUT can be a company incorporated for this specific purpose owned by the unit holder or, where it is preferable to keep this entity 'off balance sheet,' it can be owned by a charitable trust. Ogier can provide a charitable trust/charitable trustee service for this purpose.
The conditions which the private trust company must meet to take advantage of the 'private trustee company' exemption are as follows:
- Its purpose must be solely to provide trust company business services in respect of a specific trust or trusts;
- It must not solicit from or provide trust company business services to the public; and
- Its administration must be carried out by a registered person registered to carry out trust company business under the FS Law.
Ogier Real Estate Services Limited and Ogier Fund Administration (Jersey) Limited are companies registered under the FS Law and can be used to fulfil condition 3 above.
Due Diligence
Prior to establishing a private trustee company and a JPUT, the administrator will need to identify the beneficial owners and may need to obtain due diligence documents to meet its obligations under local anti-money laundering legislation.
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.
