GREIT09040 – Miscellaneous: indirect ownership of property: non-resident unit trusts

There is no single answer that applies to all non-resident unit trusts, and not even one for all unit trusts established in a particular location. The result depends on the nature of the deed establishing the trust as well as the laws of the jurisdiction under which the trust is set up. There are two broad alternatives: the entity is transparent for income, or it is not.

Transparent for income

Here, the unit holders are entitled to the income of the underlying assets as it arises. This is typically the case where there are a small number of unit holders, a small number of properties and little change in either over time. To the extent the income arises from property that meets the definition for a property rental business, then an Entry Charge will be payable in respect of the unit holder's interest in the property held by the trust and the income arises to C (tax-exempt).

Note however that property owned via a unit trust (even if it is transparent) is unlikely to count as a 'single property' for the purposes of Tax-exempt business Conditions 1 and 2. This is because a single property is a unit capable of being let out: it is hard to imagine how a part share of a shop say could be let out separate from the parts of the shop owned by the other unit holders.

Others

The alternative is that unit holders are entitled to payments out of the trust at the discretion of the trustees/ managers. This is typically the case where there are a large number of unit holders, a large number of properties and frequent change in both over time. The payments made to unit holders, even though they may arise to the trustees as property income, will generally be an annual payment for UK tax purposes. No Entry Charge will be payable in respect of the unit holder's share in the value of the property held by the trust, and the annual payments arise to C (residual).

Which applies?

Whether or not a non-resident unit trust falls in the first or the second category depends on the nature of the trust deed and local law. It is the responsibility of the unit holder to seek advice on the basis of applicable law, and to be prepared to share correspondence on the subject with HMRC if questions are asked.

Disposals and part-redemption of units

Note that, because of the effect of section 99 TCGA, sale or full or partial redemption of a holding of units in a non-resident unit trust will result in a chargeable gain arising to C (residual). This is regardless of whether the unit trust is transparent or otherwise for income purposes.