23 January 2006
The run-up to the pre-Budget report in December 2005 caused a frenzy of Jersey property unit trusts (JPUT) work in Jersey on the expectation that the Stamp Duty Land Tax exemption in Section 64A of the Finance Act 2003 would be removed. However, the exemption was untouched by Chancellor Gordon Brown and the JPUT remains, at least until the March 2006 Budget statement.
The rise of real estate investment trusts (Reits) has generated much speculation, and the detail was awaited with interest in the context of the probable removal of the JPUT. Draft consultation papers and responses to it have been circulating since April 2003, when the first consultation paper was issued. The current situation is that draft legislation has been published, along with a final consultation paper. Certain key details remain to be finalised, notably the interest cover limit, maximum percentage of ownership for any one shareholder and the details of the 'entry' charge.
What will be the likely future for JPUTS, how will these fit in with Reits and how (if at all) will Reits have an 'offshore angle'? From the offshore perspective, some issues are of more relevance than others.
The success of Reits will lie in them being more attractive, in terms of administration costs and taxation, than the existing tax-efficient property investment vehicles of which the JPUT is the most striking and popular example. It is not too much of an exaggeration to say that it would be hard to find a large-scale commercial property that is not in a JPUT structure.
From the offshore perspective, three issues (two of which are connected and overlap) arise: first, as currently proposed, no shareholder can own more than 10 per cent of any Reit. From the offshore angle, if an overseas shareholder owns more than 15 per cent of a company (10 per cent from 2009), it is not subject to withholding tax on dividends. This rule has been applied across the board to include UK resident shareholders to avoid infringement of EU anti-discrimination laws. Whether the percentage changes, or a 'Jersey' exception is carved out, remains to be seen.
Second, a 10 per cent rule is likely to stop the straightforward conversion of existing property-owning vehicles in the UK to Reits, although of course this depends on the nature of the current share ownership of the existing UK companies.
Connected to both the first and second points is the question of how existing JPUT structures may be assimilated into Reits. The draft legislation does not allow a UK non-resident company to convert into a Reit. Will a JPUT be able to potentially act as non-resident shareholder, or will the trend be for the collapse of the structures and possible conversion of existing units into shares in the new Reit companies?
The key for this - as well as for existing UK property investment companies - will lie in the detail of the 'entry' charge (Section 11 of the draft legislation has been left blank) and whether provision will be made for a separate conversion charge from a JPUT to a Reit. Thus, a situation could develop where a JPUT exists side by side with a Reit or, as is possible, the Chancellor will attempt to entice the JPUT back on shore through a tax-neutral conversion 'charge'. Either way, details of such a charge are unavailable and we will need to wait until the Budget in March to arrive at a sure position.
The third issue from an offshore perspective is the requirement under Section 4 (5) of the draft legislation for the company forming the Reit to be publicly listed on a recognised stock exchange. It is clear that concerns have been raised as to the extra costs involved in a public listing, plus the impact of both the Prospectus Directive and Transparency Directive. The Channel Islands Stock Exchange (CISX) may fulfil this need as it is outside the scope of the Prospectus Directive and Transparency Directive, but is still a recognised stock exchange under the Income and Corporation Taxes Act 1988. Additionally, the FSA has approved the CISX as a 'designated investment exchange' under the Financial Services and Markets Act 2000.
Listing on the CISX, compared with the London Stock Exchange or even the AIM, is fast, efficient and cost-effective. The continuing obligations regime, outside of the non-applicability of the Prospectus and Transparency Directives, is light-touch and geared to understanding the nature of the investors and the types of products listed.
It is possible that a situation could develop where Reits and JPUTs co-exist. Much will depend on whether the tax advantages of the JPUT continue to be more attractive than the Reit. Notwithstanding whether Reits and JPUTs co-exist, any UK property investment company converting into to a Reit will need to be listed on a recognised exchange, and a listing on the CISX could be just the ticket.
Mark Lewis is a partner and Christian Harran a solicitor at