Investors speed through transactions before pre-Budget report closes tax loophole

Lawyers in London and Jersey say they have been working flat out to complete transactions before the government’s expected closure of a tax loophole on Monday.

Chancellor Gordon Brown is expected to use his pre-Budget report to end a two-year tax bonanza under which property transactions have avoided Stamp Duty Land Tax through the use of Jersey property unit trusts (JPUTs).

‘It is fair to say that everybody is now working very hard on this, both in London and Jersey,’ said Deborah Lloyd, corporate real estate partner at Nabarro Nathanson.

‘It has been difficult for the last few weeks to get any new JPUT deals under way because there aren’t enough people to handle them.’

This view was echoed by Richard Croker, a tax partner at CMS Cameron McKenna: ‘All eyes are on what the pre-Budget report will say. We don’t know for sure that JPUTs will go but there’s a good chance they will, so it is important for clients that the deals are pushed through.’

Under JPUTs, the seller of a property transfers it into an offshore trust that issues units back to the seller. These units, representing the property, are then sold to a buyer without incurring Stamp Duty Land Tax.

It was originally envisaged that only financial institutions would use this mechanism, but widespread use by property companies has prompted the Treasury to consider a review of the legislation.

‘The only surprise is that this relief hasn’t been closed down earlier,’ said Hira Sharma, tax director at consultant Chiltern. ‘Perhaps it was embarrassment on the part of the Treasury in having to withdraw a relief that was only introduced relatively recently. It is strange that it has been allowed to continue.’

While the industry accepts that the life of the JPUT may be coming to an end, it hopes the government will still allow certain transactions to be structured in this way.

‘Originally, JPUTS were intended for financial institutions, not property,’ said Michael Goldstein, partner at accountant BDO Stoy Hayward.

‘It is possible the government will stop the JPUT being used for single property transactions but allow the other types of transaction to continue.’

Goldstein hopes the government will soften the blow of withdrawing JPUTs with the introduction of real estate investment trusts (REITs).

He said: ‘[REITs] would be a good way for the government to present the property industry with an alternative.’