The major players in the market for UK property investment have changed over the last few decades, from the state, government and wealthy individuals to institutional investors, private equity and sovereign wealth funds. There has also been a large increase in the number of overseas investors.
Guernsey has long been popular with private individuals and companies as a jurisdiction for structuring investment into UK real estate. Each type of property asset has its own attributes, and this will determine the choice of holding structure.
This article outlines some of the trends in the current market and why Guernsey is popular with today’s property investors. It focuses on some favoured structures, and the features which make them vehicles of choice.
Guernsey Collective Investment Scheme
A Guernsey Collective Investment Scheme (GCIS) does not suffer local income tax and pays only an exempt status fee (although Guernsey residents investing in such structures are taxable on any income received).
A GCIS is not subject to capital gains tax, and if an investor transfers units/shares there is no Stamp Duty to pay. Unit trusts, partnerships and companies can all be held within a GCIS. The choice of structure will usually be driven by the target investor’s jurisdiction. From a Guernsey perspective, there are several different types of property vehicles, from regulated to registered. A relatively new registered structure that is generating considerable interest is the Private Investment Fund (PIF).
Private Investment Fund
The PIF has attracted significant interest, as it is a lightly regulated fund with a maximum of 50 investors. Most fund managers should be well acquainted with the type of investor this structure will attract and their associated risk tolerances. The PIF regime is well suited to new managers and costs are reduced by the absence of any requirement for a prospectus (owing to the closely controlled nature of the vehicle). However, it is always preferable to have at least a mini prospectus, to ensure that no issues arise at a later date. The PIF allows new managers to establish a track record, before potentially launching larger funds. Existing managers can use PIFs to launch new funds in a quick and cost-effective manner.
PIFs have attracted considerable interest from wealthy families and joint venture partners looking to pool funds in order to make substantial UK property investments. Regions such as the Middle East are also more familiar with funds than trust structures.
A structure that has long been used to hold UK real estate is the Baker Trust, under which any income generated is attributed directly to the individual investors. These structures are usually closed ended unit trusts with a fixed life, which can be extended for an additional short period whilst the entity is being wound up, or where there are practical reasons for extending the holding period (for example short-term market weakness or liquidity issues).
Under a Baker Trust there is typically a further structure for facilitating the acquisition and disposal of investments. This could be a UK partnership, which will also be transparent for tax purposes. One recent case involved a group of individuals looking to set-up a Guernsey Property Unit Trust (GPUT) to invest in UK commercial real estate, funded by a wealthy individual from the Middle East. Development opportunities were identified in affluent areas of the UK (excluding London), and the properties were renovated before being rented out, generating a strong yield. A GPUT was selected because of its flexibility and the favourable regulatory framework to which it was subject.
Protected Cell Company
Another structure used to own property is the Protected Cell Company (PCC). Guernsey was the first jurisdiction to permit cell companies when it introduced the Protected Cell Companies Ordinance in 1997. The Incorporated Cell Companies Ordinance followed in 2006, and both of these ordinances were consolidated into Guernsey company law in 2008.
A PCC is a single legal entity, with one set of articles and one board of directors. It consists of a core and any number of cells. Assets and liabilities belonging to a particular cell are segregated from those of the core and other cells, and losses arising in one cell do not taint profits or assets in another cell or the core. By default, any asset or liability not attributable to a particular cell is deemed to attach to the core. As a PCC is a single legal entity, all contracts are made with the PCC itself, which then identifies the cell to which the contract relates. For this reason, the cells of a PCC cannot contract with each other.
There have been some interesting PCC structures over the years. One involved a Guernsey PCC which issued two loan notes of differing duration on the International Stock Exchange, with the funds being invested in a Unit Trust. Wealthy private clients are also using PCCs to hold substantial properties in individual cells.
It is important to ensure that the management and control of a PCC is based in Guernsey, and that the PCC has a board of directors with a majority of Guernsey resident directors. All administration of the entity should also take place in Guernsey.
In summary, we expect to see more interest in the UK real estate market from overseas investors following Covid-19, and Guernsey will continue to offer tax-neutral platforms through which such investments can be made.