Offshore Property Unit Trusts
In the Budget edition of Open Door in March this year, we reported the withdrawal of unit trust seeding relief for land transactions with an effective date of on or after 22 March 2006. Notwithstanding the abolition of the relief, offshore property unit trusts will remain a feature of property lawyers’ lives for a considerable time to come, given the large volume of properties and property portfolios now held within offshore unit trusts. The use of these types of structures, while achieving an initial SDLT saving, have by their very nature introduced complexities and additional considerations which simply do not arise where direct interests in properties are bought and sold.
For closely held unit trusts owning a property or portfolio of properties, it is worthwhile taking some time to consider whether the offshore unit trust should be retained in the longer term. Maintaining such a structure and its offshore tax resident status involves additional annual costs (in the form of trustee fees and other professional fees) that can mount up, especially where the property in question is a portfolio or comprises a large number of occupational leases and there is a lot of activity in the form of grants of licenses, sub-leases, assignments and the like. There are also numerous year on year compliance issues to be borne in mind that also have attendant direct and indirect costs. Where there are only one or two unit holders rather than a large retail-type unit holder base and it is intended that the property or portfolio will be a long-term hold, then it may be advantageous to dismantle it. This is usually achieved by winding up the unit trust and distributing the property in specie (free of SDLT). This route can be complicated by the financing arrangements for the structure and will require full lender co-operation.
Even where a property held in a unit trust will be sold on in the short term, some purchasers are not enthusiastic about acquiring units in a unit trust (or, for some investment vehicles, may be prohibited from doing so). This is despite there being - at least for now - no form of UK stamp tax charge on a transfer of units in such a trust. In these cases, there is a choice of selling the property direct from the unit trust to the purchaser and return net sale proceeds to unit holders once any bank debt has been repaid, or dismantling the unit trust first. Whether one of these alternatives is preferred will depend on factors such as the number and location of the unit holders, lender preference, and timetable issues.
All in all, although seeding relief has gone, its legacy in the form of a large volume of property packaged in offshore unit trusts, remains. Anyone who continues to hold property through such a structure should monitor their ongoing value and benefits very carefully.
SDLT saving structures not dead yet
Despite the abolition of seeding relief for offshore property unit trusts, there are still some SDLT saving structures that may be suitable for use in some commercial property acquisitions. One such structure involves the use of break clauses (there are a couple of variations on this theme) while another utilises opportunities offered through the drafting of the SDLT partnerships legislation. These structures are perhaps not so readily usable as offshore property unit trusts and we certainly do not expect their use to become as widespread but they do merit consideration at the very earliest stages of a transaction. As with most forms of the offshore unit trust structure, co-operation between seller and purchaser is a key ingredient, lender buy in on both sides (if applicable) will be required and early stage planning is essential.
Under the UK’s current tax disclosure rules, these types of structure are in our view disclosable by their promoters, and it is possible that if they are undertaken in sufficient volume, the Government will take steps to introduce curbing legislation. However, the Government has announced it will not as a matter of policy introduce retrospectively effective anti-avoidance legislation and it is generally thought that challenges by HMRC through the courts are highly unlikely. Since not all transactions will be suitable for these types of structures, we would be pleased to advise you in more detail on the basis of any particular acquisitions or disposals you may be contemplating.