Guernsey Property Unit Trusts (GPUTS) are a frequently used vehicle for holding UK real estate. Recent changes to capital gains tax in the UK has created a level playing field between onshore and offshore structures and this has helped renew interest in the use of GPUTs when structuring investments into UK real estate given the flexibility a GPUT offers.
This note gives a brief explanation on the key features and benefits of GPUTs and explains why GPUTS are common vehicles for investing into and holding UK real estate.
What is a GPUT?
A GPUT is a unit trust established under the Trusts (Guernsey) Law, 2007 (Trusts Law). It is a specific type of Guernsey trust and is primarily used to acquire and hold interests in UK real estate.
As a trust, a GPUT is not a separate legal entity and therefore the legal ownership of assets is vested in one or more trustees who hold such assets on trust for the unitholders of the GPUT.
What are the advantages of using a GPUT?
There are many advantages to using a GPUT, the main ones being:
- Familiar structure – GPUTs are well known structures and their use is familiar to, and accepted by, investors, advisers, lenders and authorities in the UK and elsewhere.
- No auditing requirement – save where the GPUT is a regulated fund, there is no legal obligation for a GPUT to appoint an auditor. However, it is open for the trust instrument to require this and third party debt providers generally require audited accounts as part of such financing arrangements.
- Ease of winding up – subject to the terms of the trust instrument, there is usually no requirement for a liquidator. Once the assets have been distributed, the GPUT will come to a natural end as per the term of the trust instrument and the usual trust principles.
- Flexible arrangements – the Trusts Law is not prescriptive with the regulation of the GPUT being left to the terms of the trust instrument. Trust instruments can be tailored to meet any particular operational or managerial requirements of investors.
There are no legal restrictions on a GPUT's ability to borrow, nor are there any gearing restrictions. Provided the trust instrument permits it, a GPUT can grant security and security can be taken over the units in a GPUT under the Securities Interests (Guernsey) Law, 1993 in the same way as security is taken over shares in a Guernsey company.
There are no restrictions under Guernsey law as to the manner in which the GPUT may make distributions.
A GPUT can also issue different classes of units; which may allow certain investors to receive different returns on their units (similar to preference shares in a company).
Units are easily transferable in much the same way as the transfer of shares in a company. Further, the redemption of units, or a subscription of further units, is also a straight-forward process.
- Control – it is possible for a GPUT to be structured to give unitholders a degree of control over the GPUT if so desired. This can be achieved in a variety of ways but the most common are (i) appointing an internal manager to the GPUT, (ii) having reserved matters which require the consent of the unitholders, or (iii) appointing director(s) to the board of the SPV trustee.
- Expertise – Guernsey has a world-class professional infrastructure with numerous law and accountancy firms and corporate service providers, each of whom have a considerable breadth and depth of experience. Investors will find that they receive robust and expedient advice.
In addition to the above, the tax treatment in Guernsey and the UK of GPUTs gives rise to a further benefit. In particular:
- a trustee of a GPUT will not be liable for any income tax or capital gains tax in Guernsey.
- no stamp duty is payable in Guernsey or the UK on transfers of units in a GPUT (provided that the register of unitholders is kept in Guernsey and the GPUT qualifies as a 'collective investment scheme' under UK law).
- it is possible to structure the GPUT so that the GPUT is transparent for UK income tax purposes (see below regarding a 'Baker Trust').
- a GPUT may, provided it is a 'collective investment vehicle' for UK tax treatment, elect to be transparent or exempt for direct or indirect capital gains made on the underlying property. The decision as to whether to be treated as transparent or exempt will depend on a number of factors but ultimately both result in only the investors being subject to capital gains tax (and if such investors are themselves exempt then no such tax will be payable).
How is a GPUT established?
A written trust instrument is required to establish a GPUT. Such trust instrument will set out the terms on which the trustee holds the trust assets for the unitholders and will also include governance matters of the GPUT.
In order for the GPUT to be transparent for UK income tax purposes, the trust instrument should provide that the income from the trust accrues and belongs to unitholders as it arises, rather than forming part of the trust fund (known as a 'Baker Trust').
For the GPUT to be a 'collective investment vehicle' (and therefore benefit from a transparency or exemption election) under UK law there should be at least two unitholders.
The length of time required to establish a GPUT will depend on how long any commercial negotiations on the form of trust instrument take and the level of regulation (see below). The extent to which a GPUT is subject to regulation in Guernsey will depend upon the number of persons to whom an offer of units is made. As such many GPUTs fall under an exemption and are unregulated. The Guernsey Financial Services Commission (GFSC) can issue its fiduciary exemption pursuant to the Regulation of Fiduciaries, Administration Businesses and Company Directors etc (Bailiwick of Guernsey) Law, 2000, (as amended) in approximately 5 working days if the GPUT is not a fund. If the GPUT is a fund, additional regulatory requirements and approvals will apply under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).
There will also need to be a transfer of property to the trustee upon establishment of the GPUT. Often there will be one or two initial investors who will establish the GPUT by subscribing for initial units by way of a cash subscription. At a later date, further property (i.e., the real estate) will be contributed for the issue of additional units.
There is no public register of GPUTs in Guernsey and as such, the trust instrument (and other trust documents) will not be publically available.
How is the GPUT operated and managed?
While professional, regulated trustees can serve as trustees of a GPUT, usually a special purpose vehicle (SPV) is appointed to act as trustee, because it provides unitholders with greater flexibility with regard to governance and control of the GPUT without disturbing the legal ownership of the underlying property. There is an abundance of corporate service providers in Guernsey who can administer such SPVs.
The shares of the SPV are usually held by a foundation or non-charitable purpose trust for desired commerciality. In most jurisdictions, it is now not a requirement to have more than one trustee, however if the underlying property is located in the UK then the doctrine of overreaching needs to be considered and so it may be desirable to have two trustees appointed. Alternatively, a sole trustee may hold the shares in two nominee companies which in turn hold the legal title to the property as bare trustees for the GPUT.
The units in a GPUT represent an undivided share of the underlying trust fund and carry the rights set out in the trust instrument.
While there is no requirement for one, a manager may be appointed to undertake the management responsibilities while the trustees undertake a custodial role. If known at the outset that a manager will be required (and such manager is identified) then the manager may be party to the trust instrument.
In addition, a property manager may also be appointed to deal with the day-to-day management of the property, depending on the nature of the investment property.
What are the duties of trustees?
Trustees of a GPUT owe a duty to the unitholders to act with due diligence, as would a prudent person, to the best of their ability and skill, in accordance with the terms of the trust instrument; to observe the utmost good faith; and to exercise powers for the benefit of the unitholders.
Are GPUTs regulated in Guernsey?
There is a large degree of flexibility in the regulation of a GPUT and the level of regulation of a GPUT will entirely depend on the jurisdiction and structure.
If a GPUT is not a fund (i.e., does not operate under the principle of risk spreading, for example by only holding a single asset) then regulation can be light and only the exemption under the Fiduciary Law will be required.
Where the GPUT is a fund there are a variety of regulatory options available, each with differing regulatory oversight. For more information about Guernsey funds regulation, please contact Chet Pohl or Stuart Tyler.
A GPUT can be an attractive vehicle of those seeking to invest in UK real estate. They are flexible and are a tried and tested method of making such investments.
Appleby is among the leaders in corporate and finance advice in Guernsey and regularly advises clients on the establishment, and on-going management, of Guernsey based real estate holding structures. We are also able to advise on any associated financing in respect of assets held in such structures.
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.