Key points (Estimated Reading Time - 10 minutes)

What is an EPUT?

EPUT stands for Exempt Property Unit Trust. It's a special type of unit trust. They qualify as a ‘diverse investment vehicle are therefore are exempt from paying tax on buying, selling assets or rental income such as property.

When you place investments in a unit trust, you receive units equal to the price at transfer. Therefore, the amount of income and capital you are owed is based on the number of units you hold.

Unit trusts are either authorized or unauthorized.

Authorized trusts are Unit Trusts authorized by the Financial Conduct Authority (FCA). They are open-ended, so they can redeem or issue new shares at any time. They are covered by the FSCS, which provides some protection to investors in cases of firm bankruptcy. The trusts are required to be fairly liquid.

Unauthorized unit trusts, on the other hand, are not protected by the FSCS. This is because they are most likely close-ended with limited liquidity. These are usually used to hold residential or commercial property as well as limited partnerships, often in cases for pension schemes or tax-exempt entities. If a unit trust is used for these purposes, it is known as an EPUT.

Setting up an EPUT

You create your own EPUT

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Regulations that define an EPUT

On the 6th of April 2014, new regulations for the taxation of EPUTs were introduced. These can be found in full here.

Under these new regulations, the unit is an exempt unauthorized unit trust if:

  • All its trustees are UK residents;
  • All unitholders are ‘eligible investors’; and
  • It is approved by HMRC.

HMRC defines an ‘eligible investor’ if:

  • Selling of EPUT units are exempt from Capital Gains Tax unless by reason of residence; or
  • A unit holder holds all of its units before selling acting as manager of the unauthorised unit trust scheme.

Pooled investors EPUT

An EPUT Can invest in Residential and Commercial Property

A major reason that people use EPUTs is to invest in commercial and residential property, whilst reducing their tax liability. A SIPP can only invest in commercial property, it cannot invest in residential property.

If a SIPPs has somehow managed to invest in residential property, they are subject to penalties of up to 70% of the property’s value.

There are strict rules that an EPUT must follow to invest in residential property. EPUTs investing through UK schemes must follow the Genuinely Diverse Vehicle definition supplied by HRMC to avoid tax penalties.

Can an EPUT invest in overseas property?

EPUTs can invest in the UK or overseas property. Although Overseas properties may incur additional legal and management costs and some countries may require a holding vehicle to acquire and manage the property on behalf of the EPUT.

Direct ownership of UK residential or commercial property in an overseas pension scheme is not tax efficient. You will end up paying both tax in the UK and Overseas. Therefore an EPUT can act as a medium to bridge UK property to an overseas pension scheme.

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Rules for holding residential property within an EPUT.

Given you are investing in an EPUT within a UK pension scheme such as a SIPP/SSAS, the EPUT needs to be established and operated as a Genuinely Diverse Vehicle. The Requirements include:

  • If the property is residential, it cannot be occupied by an investor in the EPUT.
  • No one individual can hold more than 10% of the total value of investments. Therefore there must be at least 11 investors in the scheme.
  • Investors must be unconnected without any associations, and connected persons are limited to holding less than 10% collectively.
  • Any one person's right to receive up to only 10% of voting rights
  • The total value of assets must surpass £1 million or hold at least three residential properties.
  • No individual asset can have a value that exceeds 40 percent of the total value of the assets held directly.

However, these rules only apply if you hold the EPUT within a UK pension scheme. If you hold it, for instance, within a QNUPs scheme, these rules no longer apply. Within a QNUPS, one individual can own all the units of the EPUT and have any percentage of asset allocation, such as 100% in residential property.

SIPP/ SSAS to EPUT solution

You can buy EPUT units through your SIPP or SSAS that give you as the member full control of the investments within the EPUT. An EPUT is just another investment that is part of your SIPP or SSAS Assets.

A property can be transferred from your pension, such as a SIPP, to your EPUT. The property’s title will be legally transferred from the pension trustees to the trustee of the EPUT, with units issued to the same value by the EPUT. An independent valuation must support the transfer value of any property.

The SIPP or SSAS does not directly hold the property asset. Instead, it is holding the units of an EPUT invested in property.

Remember that the EPUT is subject to the rules set by the HMRC when holding an EPUT in a SIPP/SSAS. Therefore, you are effectively unable to hold residential property within your SIPP even through an EPUT.

A QNUPs EPUT solution to holding Commercial and Residential Property

The problem with holding property in an EPUT within a SIPP is that you can only effectively hold commercial property due to the restrictive rules. However, an alternative solution holds the EPUT within a QNUPs, which is not subject to HMRC rules as a Non-UK pension scheme. As it is not subject to UK pension rules it can hold commercial or residential property or both simultaneously.

Therefore the QNUPS buys the Units in the EPUT, the EPUT holds the properties within its wrapper.

How indirectly using an EPUT within a QNUPS/QROPS can exempt you from paying income or capital gains tax./ Why can’t you directly invest in property using a QNUPS or QROPS?

QNUPS and QROPS are non-UK pension schemes and as a result, are not awarded the same tax exemptions as UK schemes. QNUPS and QROPS are not income-tax exempt like SIPP arrangements. Therefore, rental income on UK real property will be subject to income tax. If the QROPS or QNUPS is set up as a trust, it will face a 45% tax charge on rental income, a very high charge indeed!

You can reduce the rate of tax to the basic rate of income tax of 20% using a suitable intermediary vehicle that holds its UK property interest but such a vehicle would incur additional costs without solving the tax liability problem.

New legislation in 2013 made it possible to completely eliminate this tax liability by investing in UK property indirectly by holding units in a UK exempt unauthorised unit trust, EPUT.

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The QNUPS EPUT solution when you already own property in a SIPP

Let’s say you have £3 million of investments in your SIPP, including £2 million in property.

  1. The SIPP invests its assets into the EPUT in exchange for units of the EPUT.
  2. The SIPP then sells the units to the QNUPS.
  3. The QNUPS buys the units in the EPUT, the value of the QNUPS is thus the value of those units i.e. the original value of the SIPP. The QNUPS buys the EPUT units through a loan to the SIPP.
  4. The QNUPS then pays back the loan at whatever terms are acceptable to the trustees.
  5. Once paying the loan back through the QNUPS, the member will be left with a SIPP worth £3 million, plus interest on the loan plus any investment growth if invested, and a QNUPS worth the Market Value of the assets within the EPUT.

The reason this solution is valuable to individuals with large SIPPs is that it allows them to freeze their LTA charge. It means that their assets can continue to grow in the EPUT without incurring any higher LTA charge. In the long-term, the initial advisory fees and maintenance cost of the QNUPS and EPUTS is less than the saving on the LTA charge.

Moreover, as they do not have to pay a large LTA charge now, they can continue to receive higher growth from the charge they would have paid. Therefore, when it comes to paying the frozen charge, it will be smaller in comparison to the growth gained.

You can speed up repayments to the SIPP, by paying cash into the QNUPS.

EPUTs are still subject to Stamp Duty Land Tax (SDLT).

Unfortunately, you can not eliminate your tax liability completely, you must still pay SDLT when you make purchases or acquisitions from existing registered pension schemes.

Therefore when you make an acquisition of property by a QNUPS or QROPS indirectly using the EPUT as a pension asset transfer of land interests, it will trigger a chargeable land transaction at market value for SDLT.

EPUTs are still subject to Stamp Duty Land Tax (SDLT).

Unfortunately, you can not eliminate your tax liability completely, you must still pay SDLT when you make purchases or acquisitions from existing registered pension schemes.

Therefore when you make an acquisition of property by a QNUPS or QROPS indirectly using the EPUT as a pension asset transfer of land interests, it will trigger a chargeable land transaction at market value for SDLT.

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No SDLT charge via de-enveloping transaction

However, the EPUT can hold corporate property assets without an SDLT cost by a de-enveloping transaction to move the asset into direct ownership underneath the EPUT . This would mean that the EPUT acquires all shares.

An EPUT is able to borrow more money than a SIPP OR SSAS

SIPP or SSAS are usually limited to borrowing 50% of the net value of assets. Where VAT is payable must be included in the maximum borrowing limit despite being later reclaimable this massively reduces the real value of the loan.

EPUT loans do not have the same restrictions. It can borrow an unrestricted amount, subject to terms acceptable to the trustees. This can be of huge benefit to those who may want to borrow to invest in new property, be it commercial or residential. By borrowing, you gear up your investments and can gain a higher return on your investment.

Is an EPUT subject to taxes?

  • No income or capital gains tax charges should come about on an EPUT.
  • EPUT is only available to investors who are tax-exempt such as tax exemptions from within a SIPP.

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