Cayman Islands: UK Commercial Real Estate And The Resurgence Of JPUTS

Jersey property unit trusts (or "JPUTs") have for many years been a very popular vehicle through which to acquire and hold UK commercial real estate.

Some have speculated that the days of the JPUT were numbered due to UK tax reforms, including the abolition of seeding relief from UK Stamp Duty Land Tax in 2006 and changes to the UK capital gains tax regime in 2019, but that prediction has not come to fruition and JPUTs continue to be a popular vehicle for the acquisition and holding of UK commercial real estate.

Walkers' Jersey team has recently seen an increasing number of instructions coming from South East Asia and the Middle East for the establishment of new JPUTs to acquire and hold UK commercial real estate. We have also seen existing holding structures being restructured to include JPUTs as a consequence of the recent changes to the UK capital gains tax regime.

This short note explores the background and the recent history of JPUTs.

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 by one or more Jersey-based trustees. The trustee(s) hold the trust assets on trust for the benefit of unitholders in accordance with the terms of a trust instrument (which must be in writing).

Each unitholder has an undivided beneficial interest in the trust fund of the JPUT and the rights of the unitholders (for example their rights to distributions) are set out in the trust instrument.

The JPUT issues units to the unitholders in much the same way as a company issues shares to its shareholders and those units are transferable, meaning that ownership of the underlying property can be transferred indirectly by a sale of the units in the JPUT.

A JPUT does not have separate legal personality and so contracts through its trustee(s).

The JPUT trustee(s) may appoint investment advisors and property managers to assist with the day to day management and operation of the trust property if required.

JPUT trustees

A JPUT must have a minimum of one trustee. However, where the JPUT is established to hold UK property, it is common for UK law purposes for a JPUT to have two trustees who hold legal title to the property jointly to ensure that any overriding interests are overreached.

A regulated professional trustee company in Jersey may be chosen to act as trustee. However it is increasingly common for a Jersey special purpose company to be incorporated to act as trustee (a "SPV Trustee"). SPV Trustees usually fall within an exemption meaning that they do not need to be regulated in Jersey to conduct trust company business.

SPV Trustees are generally administered by a Jersey corporate services provider who will usually provide the directors, a company secretary, a registered office and other administration services.

The trustee(s) must comply with the terms of the trust instrument and are also subject to fiduciary duties under Jersey trusts law including the duties to: (i) observe the utmost good faith and (ii) to exercise their powers (as trustee) only in the interests of the unitholders and in accordance with the terms of the trust instrument.

Ongoing Popularity

In the heady days of 2005 and 2006, acquisitions of UK commercial real estate structured through JPUTs (and to a slightly lesser extent their Guernsey cousins, GPUTs) accounted for a substantial portion of UK commercial property transactions, but changes to tax rules relating to 'seeding relief' meant that, although they didn't disappear from the map, JPUT establishments decreased in number.

That said, a steady stream of establishment of JPUTs has continued throughout, and there remain a significant number of historic JPUT structures in existence.

Taxing issues

It is fair to say that JPUTs went through a difficult period in 2017 and 2018 after the UK government's 2017 autumn budget in which it was (very quietly) announced that capital gains tax would be applied for the first time to non-UK residents' gains on direct and certain indirect disposals of UK commercial property.

A number of issues with this were raised in consultation, including that previously tax exempt investors such as pension funds and sovereign wealth funds would be subject to the tax.

In response, the UK government introduced (amongst other things) a "transparency election" which allows a JPUT to be treated as transparent for UK capital gains tax purposes. Where a transparency election has been made by the JPUT, a direct disposal of UK real estate by the JPUT will be treated as a direct disposal by each unitholder (meaning that tax exempt unitholders would retain their tax exemption).

The transparency election requires the unanimous consent of the unitholders in the JPUT and is irrevocable once made. Thankfully this election has the effect of preserving the tax neutrality of JPUTs, shifting UK capital gains tax to the level of the investor.

A resurgence?

It now seems that JPUTs are back in the spotlight for sovereign wealth, real estate and pension funds - and we have seen a series of instructions in recent months in which investors and their advisers are choosing JPUT structures for UK real estate investment.

The reasoning behind this resurgence is down in no small part to the many advantages that JPUTs have as an investment vehicle through which to hold UK commercial property including the following:

Tax transparency and efficiency

• JPUTs can be structured so that they are transparent for UK income tax and UK capital gains tax purposes, facilitating investment through the same vehicle by investors with differing UK tax treatments. This UK tax transparency means that investing through a JPUT can avoid multiple levels of taxation on a disposal of UK commercial real estate and allows UK tax exempt investors to preserve their tax treatment when investing in UK commercial property either on their own or when investing with investors that are subject to UK tax;
• No Jersey (or if properly structured, UK) stamp duty is payable on the transfer of units in a JPUT;
• Provided that the unitholders of the JPUT are non-Jersey resident individuals or legal bodies that are ultimately wholly owned by nonJersey resident individuals: no Jersey income tax or capital gains tax is payable by the trustee(s); and no Jersey withholding tax is applicable to interest payments or distributions by the JPUT trustee(s).

Flexible vehicle - the Jersey regulatory and legal framework applicable to (non-fund) JPUTs is extremely flexible allowing JPUTs to be tailored to meet the specific commercial requirements of investors.

Well known structure - JPUTs are tried and tested and are very familiar to investors, advisors and lenders involved with the UK commercial real estate market meaning that they are efficient from a transactional perspective. Additionally, the Jersey financial industry has a significant amount of experience and expertise (both legal and administrative) in establishing and administering JPUTs.

Third party finance - there are no Jersey law or regulatory restrictions on the ability of a JPUT trustee to borrow, provide guarantees, indemnities or security over the trust fund (although there may be restrictions contained in the trust instrument). Additionally, unitholders can grant security over units in the unit trust and any unitholder loans that have been provided to the JPUT. This all makes the JPUT ideally suited to transactions involving third party finance.

Cost efficient and quick to establish - a non-fund JPUT can be established in a number of days. Establishment of a non-fund JPUT requires a "COBO consent" from the Jersey Financial Services Commission, the appointment of a trustee or trustees, a written trust instrument and initial trust property (which is usually a nominal cash sum).

Private structure or Fund - the JPUT may be used as a holding structure for a single investor into a single property, as the equivalent of a "propco" SPV under a larger structure (including a non-Jersey fund), or as a fund itself with any number of unitholders and any number of properties, subject of course to appropriate regulatory approvals being obtained.

Conclusion

The slowdown that occurred in 2017 and 2018 now seems to be well and truly over and Jersey's JPUT offering is once again one of the primary options for holding real estate. Added to that, UK real estate remains a targeted "safe haven" asset class at a time of significant market disruption and uncertainty. The Walkers team has significant experience and track record in dealing with JPUTs at all stages of their evolution (establishment, acquisitions, secured financings, disposals, reorganisations and winding up) and are able to advise on their use and structuring.