Is the real estate landscape between the UK and Channel Islands one of collaboration or competition? How is this dynamic evolving in light of the UK’s CGT changes and its potential introduction of a new fund regime? Here I expand upon the thoughts I shared recently with BL magazine for its feature examining the attractiveness of UK property to international investors and the use of the Channel Islands as a pathway to UK real estate investment.
The implementation of Capital Gains Tax (CGT) on disposals of all types of UK real estate has been a cause for concern for many Channel Islands professionals, who have feared that this change – which came into effect in April 2019 – would lessen the historic tax advantages of structuring UK real estate via Jersey or Guernsey.
One could argue, however, that the economic and political environment of the last three years has had far greater impact – what with Brexit, the potential Labour win, bank lending complications and so on. There was a view that the market, especially in London, was falling and investors wanted to see what would happen before investing. This wait-and-see approach, of course, has been exacerbated further by the ongoing COVID-19 pandemic.
Really, charging overseas investors CGT merely brings the UK in line with other countries that seek to attract foreign real estate investment. It seems clear that UK real estate remains of great interest to investors across the globe.
The same applies to reputable and robust investment hubs like Jersey. It’s worth noting that, for many, structuring through ‘offshore’ jurisdictions such as Jersey has never just been about CGT; it is more about ensuring that the vehicle being used to pool funds is transparent for tax purposes, so that investors do not suffer multiple levels of taxation. Structures such as the Jersey Property Unit Trust (JPUT) are still a very compelling option to achieve this, which is why we continue to see it used so extensively.
Significantly, although CGT was also applied to gains on ‘property-rich’ vehicles (where upwards of 75% of the value is in UK real estate), the HMRC has allowed funds and other collective investment vehicles (CIVs) – including those structured as a JPUT – to make a transparency election. This means that CGT will not be payable by the vehicle but rather by the investors, as if they held the asset directly, thus ensuring that investors in CIVs aren’t unfairly disadvantaged by being taxed at multiple layers within the structure. It also means that certain exempt investors such as pension funds can remain fully tax exempt.
Another important factor to consider is the amount of UK property currently held through offshore structures that will remain so. There is little to no advantage in taking these properties back onshore. Moreover, there are other reasons to remain offshore, including estate planning and asset protection.
What about the PIF?
The post-Brexit outlook as well as the needs and demands of UK onshore managers have driven the UK’s proposed Private Investment Fund (PIF) structure. To date the UK has not had a suitable fund structure that optimises tax efficiencies while being suitably commercial to make it a viable choice for managers. The regulatory environment was complicated and did not lend itself to closed-ended alternative funds such as real estate. Brexit has sharpened the focus on this issue.
If it does get the go-ahead, the PIF could make the UK a more attractive environment for raising funds, deter fund managers from moving elsewhere in Europe (such as France), and spur post-Brexit financial growth.
It is true that on its face this move could seem to be direct competition for the Channel Islands. The UK will also be classified as a third country for AIFMD, meaning both would have to rely on NPRR to market funds in Europe.
However, it’s worth flagging that under the proposed PIF rules the manager needs to be UK-domiciled and the fund will be classed as an alternative investment fund (AIF). This means that it will require a manager (AIFM) and depository. Dependent upon the investor base and fund strategy, none of these components are required for a Channel Islands fund.
It will be interesting to see how investors react to the proposed PIF. Some may be wary that whilst the current political climate with a majority Conservative government lends itself well to launching the PIF product, political priorities can change. There may be some concern that a future government, under a more left wing stewardship, could be tempted to reassess matters as it tries to balance competing fiscal and social priorities.
PIF or no PIF, there are benefits in terms of estate planning, trusts laws and existing portfolios held through the Channel Islands that will remain. Logically investors and managers will continue to use robust and reliable existing structures, especially where they have a trusted and stable working relationship with expert service providers.
Just as the overall attractiveness of UK real estate to international investors looks set to hold in spite of everything that’s happened in recent years, the existing strength of the Channel Islands in marketing their funds internationally to key investment centres such as the US, Asia and the Middle East is unlikely to diminish.
Want more on this topic?
Stay tuned for our upcoming Real Estate Focus podcast, where I’ll be sitting down with Jessica Patel, Partner in Grant Thornton’s real estate and construction team in London, and Sophie Reguengo, Partner in Ogier’s investment funds team in Jersey, to discuss the merits of Jersey as a jurisdiction for structuring UK real estate investments.