Revenue provide guidance as to treatment of JPUTs in REIT context

United Kingdom

It has been common practice over the past few years for investors to hold UK real estate through offshore unit trusts, typically based in Jersey (JPUTs). This has often been for SDLT mitigation purposes.

There has been speculation for some time as to the treatment that will be applied to Real Investment Trusts (REITs) holding real estate through JPUTs. Indeed, at some point it was considered that owning property through a JPUT provided a means of avoiding both the 2% entry charge and SDLT on the land acquisition.

However, HM Revenue and Customs (HMRC) has now issued guidance which indicates that to the extent the JPUT is transparent for the purposes of taxing income (a Baker Trust), which will usually be the case, the UK property in the JPUT will be subject to the 2% entry charge when a JPUT is acquired by a REIT. If it is not a Baker trust it will be treated rather like a company outside the ring fence (even if there is a group REIT election in place) so that the income from the JPUT is taxable but there is no entry charge.

In the case of either form of trust, the disposal of units will potentially give rise to a chargeable gain on the REIT which will mean that although REITs can buy JPUTs (and will save SDLT when they do) they should immediately collapse them before the property assets rise in value since otherwise a taxable gain may arise on later collapse of the unit trust or other redemption or sale of the units.

Accordingly, we may now see a rush of REITs looking to collapse existing JPUT holding structures as, not only will they generally suffer a 2% entry charge in relation to JPUTs held by them on conversion into a REIT or assets acquired since, but they will also incur capital gains in relation to any increase in value in the property since acquisition in JPUT form.