Using Jersey Structures for UK Real Estate Acquisitions
Much has been written regarding the changes to UK capital gains tax (CGT) which came into force on 6 April 2019 and which imposed non-UK residents capital gains tax (NRCGT) on UK commercial real estate for the first time since the tax was introduced in the 1960s.
During the consultation process for the new legislation it was noted that investors in many offshore real estate holding vehicles could be prejudiced and suffer unintended taxation at multiple levels in an investment structure. In addition, there was a concern that UK tax exempt investors (such as UK pension schemes) would be subject to tax via their holding vehicles. These concerns were addressed by the UK and tax elections have been made available to certain types of non-UK resident structures including many of the typical Jersey real estate holding vehicles.
It is also interesting to note that during the consultation process it was made clear by HMRC in the UK that the NRCGT regime was not designed to encourage investors to simply structure their investments using UK entities but to establish a level playing field between UK and non-UK entities in relation to CGT.
The rules are fairly complex and UK tax advice should be sought when structuring UK real estate investments but there are two elective regimes which allow offshore entities (often Jersey SPV companies or Jersey Property Unit Trusts (JPUTs)) to either be (i) treated as transparent for NRCGT; or (ii) exempt from NRCGT but subject to on-going filing and reporting requirements.
Both of the exemptions only apply to collective investment vehicles (CIVs). The definition of CIV is broad and includes collective investments schemes as defined in the UK’s Financial Services and Markets Act 2000, alternative investment funds pursuant to AIFMD and real estate investment trusts (REITs).
The decision as to whether to be treated as transparent or exempt depends on a large number of factors and should be considered on a case by case basis with UK tax advisers. When new structures are set up the desired tax treatment and likely investor requirements should be considered at an early stage.
Transparency Election
This only applies to income transparent CIVs, the classic example of which is the JPUT. The election is irrevocable and must be consented to by all investors. There are certain time limits that apply to making the election depending on when the CIV is established. For example, for pre-5 April 2019 established CIVs the deadline is 5 April 2020.
It is anticipated that the transparency election will primarily be used by CIVs with a limited number of investors that are not expected to change over time. A JPUT set up as part of a “buy and hold” strategy is a good example of this. The UK real estate will be acquired and held in the JPUT for a period of time. There may be development and letting of the property and ultimately a sale of the property or the units in the JPUT. Upon a sale there will be no NRCGT at the JPUT level. Investors will be subject to CGT in the normal way.
Accordingly, for certain tax exempt investors in the UK or elsewhere this may be a very attractive option and allow a traditional tried and tested method of UK real estate holding to continue.
In addition, investors who are subject to CGT or NRCGT should only pay this tax once (ie on the gains they receive) as there is no tax at the JPUT level.
Exemption Election
For a CIV which (i) has diverse ownership (subject to a UK statutory interpretation); (ii) is non-close (typically not controlled by 5 or fewer investors) and has shares traded on a recognised stock exchange (including TISE); or (iii) is non-close and no more than 25% of the value returned on an anticipated liquidation would be subject to UK tax there is an exemption election available.
Working out whether the election exemption is available in the first place as well as analysing whether or not it is appropriate is a matter for UK tax advice. We expect that this exemption will be popular for real estate property funds and the Jersey Private Fund regime will likely be used for a number of these structures if there is not a desire to do more of a “retail” offering.
Under this exemption the CIV and all of its subsidiaries will be exempt from CGT in relation to direct and indirect disposals of UK real estate.
This exemption is applied for by the manager of the CIV and (unlike the transparency election) does not require investor consent. One big advantage of this exemption is it allows more complex or layered structures to benefit from the exemption. An example would be a Jersey REIT which holds assets via a series of SPVs. It ensures there is not taxation at multiple levels in these structures.
For investors who are subject to CGT or NRCGT they will pay tax on disposals of interests (eg. shares, units, partnership interests) in the CIV itself. Investors who would not be subject to CGT or NRCGT by virtue of being exempt themselves will continue to benefit from this treatment.
In return for obtaining the exemption election the CIV or its manager will need to make annual filings with UK HMRC disclosing various details in relation to the CIV and its group. This information will include disposals made, details of investors and any disposals or other capital transactions involving the CIV’s investors.
Summary
The availability of the elections allows investors to use traditional Jersey structures such as JPUTs or Jersey REITs and be treated in a similar manner to equivalent UK structures for CGT purposes.
Detailed UK tax advice should be obtained both in relation to existing structures and setting up of new structures but the rules will allow investors to continue to use Jersey entities as holding vehicles for UK real estate with all the familiar advantages and of the Jersey legal and regulatory regime which they will be used to.
