This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
When asked to recommend a suitable structure for a fund, joint venture or an acquisition, we have to consider the options best suited to our clients' needs and their overall objectives. Although limited partnerships and corporate vehicles are naturally very popular and often the "go to" vehicles, the Jersey Property Unit Trust (JPUT) still holds its own as an attractive contender.
Outline legal form
JPUTs are governed by a trust instrument, usually concluded between a manager and a trustee or a managing trustee. A professional, regulated trust company usually serves as the trustee, but the role may also be fulfilled by a special purpose vehicle. Assets are held by the trustee for the benefit of the investors (unit holders), who are issued with units in the trust. JPUTs holding UK property commonly appoint two trustees to facilitate "overreaching" under English property law.
The number and type of investors in the JPUT dictate the level of regulatory control. This ranges from minimal regulation where there are fewer than 15 investors, to slightly more intrusive oversight in the event that units are to be offered to more than 50 persons or listed on a stock exchange.
JPUTs historically benefited from UK tax rules that allowed property to be transferred into a JPUT without UK Stamp Duty Land Tax (SDLT) being incurred. Many buildings in London and elsewhere were transferred to JPUTs and continue to be held in them as a result. Although these rules were repealed in 2006, sufficient tax and other advantages remain to give the JPUT an enduring popularity as a vehicle for investment in UK property.
Firstly, JPUTs structured as (so-called) Baker trusts for UK tax purposes are tax transparent, meaning that rental income belongs to the unit holders as it arises, not to the JPUT. As a result, only the investor is subject to UK income tax. This neatly replicates the position the investor would have been in had it invested directly in the underlying property.
JPUTs also have the advantage of not being subject to UK capital gains tax on the sale of any UK property, unless they are considered to be "trading" as opposed to investing.
Further still, no SDLT, stamp duty or reserve tax is chargeable on any issue, transfer or redemption of units in the JPUT once the JPUT has acquired UK property. The beauty of this is that once the JPUT is up and running, any future sales or other changes to the ownership of the JPUT are free from SDLT.
There are a number of other attractive features which make JPUTs hard to set aside.
To begin with, the issue of units that are conceptually similar to shares in a company allows for easy transfer and enhanced liquidity. By contrast, transferring a limited partnership interest is more complex, hindering liquidity.
The granting of security is also relatively straightforward, as security over the units in the JPUT can be taken without the necessity of being entered on the register of unit holders (unlike for a company).
The statutory framework governing JPUTs is flexible, and operation by the trustee is subject only to ordinary fiduciary duties. This has significant benefits over a company structure, which requires adherence to rules and restrictions including capital requirements and the need to meet solvency or other tests.
The ability to issue different classes of units furthermore provides an easy way for different investors or the manager to receive varying rates of return based on the class of unit that each is issued.
Winding up a JPUT is also fairly seamless, with the procedure dictated only by the terms set out in the trust instrument governing the JPUT. There is no requirement to appoint a liquidator, meet a statutory time limit or follow any other obligations under Jersey law. This relaxed process means that once the trust property has been distributed, the JPUT will simply come to an end without further formality (although the trustee will require an indemnity from unit holders for any unforeseen claims after wind-up).
Good ol' Jersey
Jersey has long been ahead of the curve with its fund products and this is no less so for the JPUT structure. Significant investment has been made in the services needed to operate JPUTs on the island, with a wide range of managers, trustees, administrators and registrars touting for business. A good selection of service providers means competitive pricing and lower operating costs. The JPUT path also is well-trodden by the UK property industry, alongside Guernsey and the Isle of Man, which offer similar regimes for unit trusts.
It is important to remember that the management and operation of JPUTs must take place in Jersey. This can of course cause an additional administrative and cost burden where a manager has no existing operations in Jersey. The opportunity to earn some additional air miles and spend time by the sea perhaps goes some way to softening this blow for many, although if this is the main goal, a Cayman or other Caribbean structure should perhaps be considered instead!
We often advise on structures that place a JPUT above an English Limited Partnership. This allows management of the property to remain in the UK whilst providing investors with the option to invest through the JPUT. Naturally this means increased administration, with two different fund structures being managed in two different places.
However this is often a small price to pay for the efficiency and flexibility of the structure.