Introduction
Jersey property unit trusts (JPUTs) are frequently used to acquire and hold interests in UK commercial real estate, due to the ease with which they can be established and the fiscal advantages that they offer.
These advantages may include transparency for income tax and exemptions from UK capital gains tax on the sale of the underlying property, provided that the JPUT has been managed and controlled in Jersey. A further advantage associated with the use of JPUTs as investment vehicles is that the underlying property may, in effect, be transferred free of stamp duty or stamp duty land tax charges by structuring the transfer as a sale of units, rather than a conveyance of the underlying property.
These fiscal advantages, combined with the flexibility to tailor the terms of the trust instrument in order to meet commercial and operational requirements, are key to the popularity of JPUTs and mean that they are a familiar tool to principals, legal advisers, investors and lenders.
Establishing JPUTs
JPUTs are created when a trustee executes a trust instrument and the initial property is transferred to the trustee, to be held in accordance with the terms of the trust. In consideration of the client vesting property in the trust, the trustee will issue units in the JPUT to the client and enter the client’s name in a register of unitholders. Each issued unit represents an undivided share of the underlying trust fund and carries the rights attached to the unit as set out in the trust instrument.
Where the JPUT is used as an acquisition vehicle and there is a structural requirement for the trust to exist before the property acquisition occurs, the initial transfer of assets to the trust can be for a nominal cash sum.
Further capital can subsequently be introduced by way of an equity injection through subscription for additional units and, if required, by way of debt leverage so that the trustee can finance the acquisition of the investment property. Lending can be arranged on a secured basis, by having the trustee grant a legal charge over the underlying property in favour of the lender.
Alternatively, where the client establishing the JPUT already owns the real estate asset, the JPUT can be established by transferring the title to the property directly to the trustee. Such transfers are usually effected by a contribution or subscription agreement, together with execution of a land transfer form and other required registration formalities.
If the JPUT is a private vehicle with no more than 15 investors and there is no offering memorandum or marketing of the JPUT’s units in the European Economic Area (EEA), the only Jersey regulatory requirement for establishing the trust will be to obtain consent from the Jersey Financial Services Commission (JFSC) in order to raise money by issuing units under the Control of Borrowing (Jersey) Order 1958. Subject to the terms of the trust instrument and customer due diligence being provided, the necessary regulatory consent can be obtained and the JPUT established within five business days. No public register of unit trusts exists and trust instruments and unitholder registers are not open to public inspection. Where units in the JPUT will be offered to the public, regulatory consent can usually be obtained in a few weeks.
Who should act as trustee?
Most JPUTs are established with a newly incorporated Jersey special purpose company appointed to act as trustee. While it is possible to appoint a professional trust company to perform this role, using a private trustee company has two main advantages:
- It provides the unitholders with a greater degree of control over the JPUT by enabling them to populate the board of directors of the trustee with nominated individuals.
- If, in future, there is a requirement to move the administration of the trust structure to a new administrator, this can be achieved with minimal effort (and without disturbing the legal ownership of the underlying property) by transferring the shares in the private trustee company.
In contrast, where a professional trust company acts as the trustee of the JPUT and the unitholders subsequently wish to appoint a new trustee in its place, the legal title to the property and all contracts entered into by the professional trust company in relation to the underlying property must be assigned or novated to the new trustee.
Who owns the trustee?
If a private trustee company is established to act as trustee of the JPUT and it is commercially desirable to keep this entity off balance sheet, its shares can be held by a foundation or charitable or non-charitable purpose trust. Alternatively, the shares in the trustee can be held directly by the client.
Do JPUTs require more than one trustee?
No Jersey law or regulation requires JPUTs to have more than one trustee. However, from an English property law perspective, in order to avoid technical difficulties arising under the doctrine of overreaching, it is preferable to have two trustees hold any UK real estate. The use of joint trustees will enable a lender or purchaser transacting with the trustees to deal with them without being obliged to consider the equitable interests of the beneficiaries. As a practical consequence, JPUTs tend to have two corporate trustees. Where there is a sole trustee, the overreaching problem can be avoided by arranging for the trustee to hold title to the real estate jointly with a nominee (or, alternatively, arranging for title to be held jointly by two nominees) which will hold their interest in the real estate on trust for the sole trustee.
Trustee’s duties to unitholders
In addition to being regulated by the JFSC under the Financial Services (Jersey) Law 1998 (although exemptions are available – particularly for private trustee companies where the unitholders are professional or sophisticated investors), Jersey trustees must act in accordance with the Trusts (Jersey) Law 1984.
Under Jersey law, trustees must act with due diligence, as would a prudent person, to the best of their ability and skill and in accordance with the terms of the trust instrument. Depending on the nature of the real estate, the trustee may appoint a property manager to deal with day-to-day management activities (e.g., rent collection and property maintenance). In addition, trustees must observe the utmost good faith and exercise their powers solely for the benefit of the unitholders as beneficiaries.
Do JPUTs require managers?
There is no Jersey regulatory requirement for a manager to be appointed by the JPUT, although one can be appointed if this is commercially desirable. Where a manager is required, it will usually be made a party to the trust instrument in order to undertake management responsibilities. In such cases the trustee often takes a more passive, custodian role.
Role of unitholders
The relationship between unitholders and trustees is largely determined by the terms of the trust instrument. The trust can be structured to consider any requirement that a client may have in relation to interests in the trust and may, for example, determine the extent to which unitholders can take actions such as redeeming or transferring their units, removing an existing trustee or resolving that the trust be terminated. For instance, the trust may provide that the prior consent of all unitholders is required to authorise such actions.
However, where all of the unitholders agree on a particular course of action and have full legal capacity, the Saunders v Vautier principle will apply. In short, this principle provides that a trustee must act in accordance with the directions of the beneficiaries of a trust (provided that all beneficiaries are of full age, have capacity and are together wholly entitled to all of the trust assets). This means that the unitholders may be able to alter the terms of the trust, irrespective of the terms of the trust instrument.
Unitholder control rights
Unitholders can control the actions of the trustee in various ways, although specific advice must be taken to ensure that any control rights reserved for unitholders do not jeopardise the tax structuring objectives. Common techniques are:
- including a schedule of reserved matters in the trust instrument in relation to which the trustee cannot complete without the prior consent of all (or a specified majority) of the unitholders;
- including an advisory committee in the trust structure to advise the trustee in relation to investment opportunities and other strategic decisions; and
- using a private trustee company as trustee of the JPUT with the unitholders nominating individuals to the board of directors.
Baker trusts
A JPUT is often required to be a ‘Baker trust’. Named after the UK case Baker v Archer-Shee, this term simply means that the trust instrument is drafted in such a way that the income generated by the trust assets accrues directly to the unitholders as it arises, rather than forming part of the trust fund for later distribution by the trustees. In relation to UK real estate investments, this will generally result in a pass-through investment vehicle and a tax-transparent structure for most unitholders. The benefit of a Baker trust is that the income of the JPUT will be directly attributable to the unitholders pro rata and they will be able to offset any expenses of the JPUT against that income.
Restrictions on making distributions
Compared to UK corporate investment vehicles, JPUTs are extremely flexible. Subject to any restrictions in the trust instrument, there are no Jersey legal or regulatory limitations on the exercise of the trustee’s power to distribute trust assets to unitholders or the source from which such distributions may be made. For example, no restrictions require distributions to be made out of the realised profits of the trust fund. Distributions may be made from the capital of a JPUT without needing to satisfy a solvency test or other test. Where there is more than one unitholder, the trust instrument will usually provide for distributions to be made in proportion to the units held.
Security over units
It is possible to create security over units in a JPUT and most UK banks are familiar with lending to JPUTs on a secured basis. For the purposes of the Security Interests (Jersey) Law 2012, a unit is treated as an investment security and, as such, qualifies as collateral for the purposes of a security interest agreement and securing a loan.
Regulatory considerations
JPUTs are extremely flexible compared to property investment vehicles available elsewhere. For example, as no leverage limitations or concentration restrictions exist, the trust portfolio may consist of a single property. Further, there are no restrictions on unitholders’ percentage interests in the JPUT or on the number or type of classes of unit that may be issued.
Where there are no more than 15 investors and no marketing of interests in the EEA, a JPUT will be treated as a private structure and will not be regulated by the JFSC. If there will be more than 15 investors or a marketing of interests in the EEA, it is likely that Jersey regulatory consents will be required; however, the level of regulatory supervision will depend on the sophistication of the investors and the minimum subscription required to be made under the terms of the trust instrument.
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