Real Estate Funds: An Overview
Nick Cronkshaw Stéphane Ober David Williams
Agenda Background - structuring objectives Sample Structures The Future?
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Background Objectives –
Tax efficiency
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Regulatory efficiency
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Commercial suitability
Context –
Development -v- Investment
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Fund -v- “Club”
Sample Structures –
Vehicles and relationships
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Tax
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Regulatory
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Fund type 1 – English LP with REIT Limited Partners
English/Jersey GP
English Limited Partnership
Fund Management Agreement
Carry ?
Listed Shares (CISX)
Fund Manager
UK REIT Jersey incorporated company (UK tax resident)
Property Management Agreement
UK Propco
UK Residential Real Estate © Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Third party debt
Fund type 1 – English LP with REIT
Key UK tax structuring –
Investment holding structure for acquisition of UK property.
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English LP fully transparent and a collective investment scheme under FSMA 2000 (CIS).
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Jersey incorporated company and UK propco meet all the conditions to qualify as a REIT, including (not all listed): –
Company conditions (Jersey incorporated company): tax resident solely in the UK; not an OEIC; shares admitted to trading and listed on a recognised stock exchange (CISX); not a close company (English LP that is a CIS meets this requirement).
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Property rental business conditions: at least three properties; no single property representing more than 40% of the total value.
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Note certain letting of property excluded – eg letting of owner-occupied property does not qualify and would not form part of REIT’s tax-exempt business.
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Balance of business condition – 75%+ of total income from tax-exempt business and 75%+ of total value of assets from tax-exempt business.
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90% distribution requirement – 90%+ of net income from tax-exempt business must be distributed before filing date for the relevant accounting period.
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Note restriction on borrowing – UK corporation tax charge arises if income of REIT’s tax-exempt business does not cover its related financing costs (ie UK propco’s third party debt) at least 1.25 times.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Fund type 1 – English LP with REIT
Key UK tax features –
REIT’s income and gains from tax-exempt business ring-fenced and exempt from tax.
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Distributions in respect of such income and gains (PIDs) taxed as UK property income in hands of limited partners. Subject to UK withholding tax as follows: –
If limited partner is a UK company or an exempt body (eg pension fund or charity) – exempt (but UK company subject to UK corporation tax on PIDs).
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If limited partner is a UK resident individual – 20% (plus further income tax if higher/additional rate taxpayer)
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If limited partner is non-UK resident – 20% but possibility of reduction under double tax treaty.
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Non-Resident Landlords Scheme does not apply to PIDs.
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No UK tax for non-UK resident shareholders on disposal of REIT shares.
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Note possible preference for REIT for holding UK residential property (given introduction of UK’s non-resident capital gains tax rules).
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Fund type 2 – JPUT with English LP Principals
GP Scottish Limited Partnership
Unitholders
Fund Manager
A Units B Units (carry class) Fund Management Agreement
Trustee JPUT UK GP 99.9%
0.1% English Limited Partnership
UK Real Estate
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Third party debt Development Contract
Fund type 2 – JPUT with English LP
Key UK tax structuring –
Investment holding structure for acquisition of UK commercial property.
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Incentivisation of UK resident carry holders with units entitled to capital only.
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JPUT structured as a “Baker Trust” and qualifies as a unit trust scheme under FSMA 2000.
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Fully transparent English LP acquires UK property and holds for development purposes.
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Structure financed through issuance of units and third party debt.
Key UK tax features –
Acquisition of JPUT units does not attract UK SDLT (as transfer of units, not land) or UK stamp duty / SDRT (as transfer of units in an offshore unit trust).
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JPUT treated as transparent for UK income tax purposes so income treated as accruing directly to unitholders. UK’s Non-Resident Landlords Scheme relevant to non-UK resident unitholders.
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JPUT treated as opaque for UK capital gains tax purposes. No UK tax on chargeable gains on sale of UK property. No UK tax for non-UK resident unitholders on disposal of JPUT units.
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UK resident carry holders owning units entitled to capital only means the UK’s Offshore Funds Rules should not apply so the JPUT is not treated as an offshore fund and carry holders taxed on disposal of units at UK capital gains tax rates (28%) rather than UK income tax rates (45%). As a protective measure, reporting fund status for the JPUT may also be obtained.
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Development contract entered into by UK GP so JPUT kept offshore.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Comparison of REIT and JPUT structures Acquisition of commercial property – tax summary REIT
JPUT
Tax structuring requirements
Restrictive statutory framework.
“Baker Trust” and CIS qualification.
Tax on vehicle – income tax
No UK income tax at level of the REIT – REIT exempt from tax on income from taxexempt business.
No UK income tax at level of the JPUT – JPUT transparent for UK income tax purposes (if “Baker Trust”).
Tax on vehicle – capital gains tax
No UK capital gains tax on sale of UK property – REIT exempt from tax on gains from tax-exempt business.
No UK capital gains tax on sale of UK property – JPUT offshore and opaque for UK capital gains tax purposes.
Tax treatment of non-UK residents
PIDs (representing income and gains) subject to UK withholding tax with possibility of reduction under a double tax treaty.
Income (only) from UK property subject to UK income tax generally with no deduction at source.
Tax treatment of UK residents
Individuals – PIDs subject to UK withholding tax and further tax if higher/additional rate taxpayer Companies – PIDs exempt from UK withholding tax. Subject to UK corporation tax as UK property income,
Individuals – subject to UK income tax on income from UK property. Companies – subject to UK corporation tax on income from UK property.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Fund type 3 – Luxembourg regulated fund Management Agreement Investors
Luxembourg / UK AIFM
Luxembourg GP Advisory Agreement Luxembourg Specialised investment fund
Carry ?
Equity / Debt instruments
Investment advisor
Luxembourg special purpose vehicle
Third party debt
Lux Propco
UK Devco
UK Real Estate Asset © Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Property development agreement
Fund type 4 – Luxembourg unregulated fund Investors
Luxembourg GP
Luxembourg Special limited partnership
Advisory Agreement
Carry ?
Equity / Debt instruments
Investment advisor
Luxembourg special purpose vehicle
Third party debt Third party debt
Lux Propco
UK Real Estate Asset
UK Propco
UK Real Estate Asset
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Fund type 5 – Jersey ICC Investors: Cell 1
Fund Manager
Investors: Cell 4 etc.
Fund Management Agreement Jersey Incorporated Cell Company
Property Management Agreement
Propco Cell 1
Propco Cell 4
UK Real Estate
UK Real Estate
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Third party debt
Fund type 5 – Jersey ICC
Tax structuring and features similar to fund type 3.
Key UK tax structuring
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Investment holding structure for acquisition of UK commercial property.
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Separate cells for different groups of investors.
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Each cell has segregated liability and holds (via a propco) a single UK property.
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Separate offshore property holding company for each UK property.
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Propcos financed with a combination of equity and debt (including third party debt).
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Propcos registered for the UK’s Non-Resident Landlords Scheme.
Key UK tax features –
Separate propcos mean flexibility for future exits and mitigation of UK SDLT for purchaser / increase in purchase price for seller in the event of a share sale.
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Offshore propcos mean the UK’s Non-Resident Landlords Scheme should apply so only profits from UK property subject to UK income tax with no deduction at source and deductions for interest incurred on debt. No UK tax on chargeable gains on sale of UK property.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Other UK tax issues - common themes
UK resident investors and UK’s anti-avoidance provisions – offshore funds rules, CFC rules, attribution of gains rules, diverted profits tax.
Non-residents and UK residential property – ATED (annual tax on enveloped dwellings), ATED-related capital gains tax and non-resident capital gains tax.
Tax residency – ensure offshore entities stay offshore.
UK permanent establishment (“PE”) – consider whether any UK adviser could constitute a PE of the fund in the UK.
Arm’s length arrangements – ensure fees payable to any service providers (ie advisers, property managers) and interest rates on any shareholder and third party debt are arm’s length.
UK withholding tax – ensure interest on any debt is not UK source (generally the case where parties are outside the UK and the debt is not secured over the UK property).
UK SDLT – payable on acquisition of properties but note that multiple dwellings relief may reduce rate.
UK VAT and recoverability – consider whether payable and recoverable in respect of acquisition of UK property (consider option to tax and TOGC) or interests, and service agreements.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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The Future? Tax –
Carry?
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VAT?
Regulations –
AIFMD
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ELTIFs
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