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 tax advantages they can potentially bring.
These advantages may include transparency for income tax and exemption from UK capital gains tax on the sale of the underlying property, provided the JPUT has been managed and controlled in Jersey. A further advantage associated with using the JPUT as an investment vehicle is that the underlying property may, in effect, be transferred free of any stamp duty or stamp duty land tax charges by structuring the transfer as a sale of units rather than as a conveyance of the underlying property.
These fiscal advantages combined with the flexibility to tailor the terms of the trust instrument to meet commercial and operational requirements are key to the JPUTs popularity and mean that it is a very familiar structure to principals, legal advisors, investors and lenders.
How is the structure established?
A JPUT will come into existence on the execution of a trust instrument by a trustee and the transfer of the initial property to the trustee to be held in accordance with the terms of the trust. In consideration for 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 unit issued represents an undivided share of the underlying trust fund and carries the rights attaching to such unit as set out in the trust instrument.
Who should act as trustee?
The majority of JPUTs are established with a newly incorporated Jersey special purpose company appointed to act as trustee. Whilst it is possible to appoint a professional trust company to perform this role, using a private trustee company has two main advantages:
Firstly, 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.
Secondly, if in the future there was 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 means of a transfer of the shares in the private trustee company.
By contrast, where a professional trust company is trustee of the JPUT and the unitholders subsequently wish to appoint a new trustee in its place, it would be necessary for the legal title to the property and all contracts entered into by the professional trust company in relation to the underlying property to be assigned or novated to the new trustee.
Who will own 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 trust. Ogier are able to provide in-house foundations and charitable trusts for this purpose. Alternatively, the shares in the trustee could be held by the client directly.
Does a JPUT require a manager?
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 to undertake management responsibilities and the trustee will tend to take on a more passive, custodian role
Role of the unitholders
The relationship between the unitholders and the trustee will, to a large extent, be determined by the terms of the trust instrument. The trust can be structured to take into account any particular requirement a client may have in relation to interests in the trust and may, for example, determine the extent to which unitholders are able to take actions such as redeeming or transferring their units, removing an existing trustee or resolving that the trust be terminated.
The trust may provide, for instance, that the prior consent of all unitholders is required to sanction such actions. It should be noted, however, that where all of the unitholders are in agreement on a particular course of action and have full legal capacity, the Saunders v Vautier principle will apply, meaning that irrespective of the terms of the trust instrument, the unitholders may be able to alter the terms of the trust.
Unitholder control rights
There are various ways in which unitholders are able to control the actions of the trustee, although specific advice needs to be taken to ensure that any control rights reserved to the unitholders do not jeopardise the tax structuring objectives. Common techniques include:
including in the trust instrument a schedule of reserved matters in relation to which the trustee may not take any action without the prior consent of all (or a specified majority) of the unitholders;
including within the trust structure an advisory committee 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.
Are there any restrictions on making distributions?
In comparison to UK corporate investment vehicles, JPUTs are extremely flexible.
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, there are no restrictions requiring distributions to be made out of the realised profits of the trust fund and distributions may be made from the capital of a JPUT without the need to satisfy a solvency 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.
