Real estate investments of UK Trust in Hungary after Brexit

Legal aspects of the transfer of managed assets between the UK and Hungary : is the acquisition of real estate in Hungary by any UK resident (legal or natural) subject to authorisation? Own the property through SPV or directly by the trustee?

After the end of the Brexit transition period (31.12.2020), UK natural and legal persons will be able to acquire property in Budapest with the permission of the Budapest Government Office and in the countryside with the permission of the relevant local government offices. Exceptions to this rule are branches or subsidiaries of foreign companies in Hungary, which still do not need a licence to acquire property.

Conditions for obtaining a licence:

1. it is not prejudicial to the public interest or the interests of the municipality,
2. the applicant is an individual entrepreneur or a member of an individual firm within the meaning of the Act on Individual Entrepreneurs and Individual Firms and intends to carry on an economic activity in Hungary, and the property to be acquired is necessary for the pursuit of such economic activity; or the applicant intends to reside in Hungary on a permanent basis. Furthermore, the acquisition of the property by the applicant is not contrary to the public interest,
3. the identity of the foreign natural person, or the identity of the branch or commercial representation of the foreign legal person within the meaning of the Branch Act can be established with reasonable certainty, and
4. the intention to transfer ownership of the real estate can be established.

The authorisation procedure itself is usually formal, taking approximately 45-60 days. The administrative service fee for the application is HUF 50,000 per property.

In the light of the above, it can be concluded that the acquisition of real estate by a natural or legal person resident in the United Kingdom is generally subject to a prior authorisation procedure. The licensing procedure is due at the same time as the act of acquisition of the property in Hungary (transfer of ownership under a contract of sale or trust).

An important addition: any Hungarian company established by a foreign person (legal or natural) may acquire ownership of residential real estate without any further authorisation and under the same conditions as domestic companies. (This exception does not apply to real estate classified as agricultural land.)

Differences in the cases of property acquisition in Hungary.

If, in accordance with the law, any person can acquire real estate either without a licence or with a licence, there are no differences in the acquisition of ownership and its content. This also means that, regardless of the method of acquisition, the same rights are conferred on the owners regardless of whether the property was acquired as a trustee, a legal entity or a private individual.

Issues related to the relocation of Trust:

The institution of trust in the Hungarian legal system is relatively recent, as our Civil Code has recognised this legal institution since 2014. As a consequence, many issues, especially the international relations of trusts, are still unresolved, and due to the minor or major gaps in regulation, they are open to various interpretations. This is an advantage in some respects, but also a disadvantage in others.

The objective of the present case is to transfer the assets under administration to Hungary by purchasing a property in Hungary in order to protect the interests of the UK life tenant/beneficiary and, in the event of his death, his surviving heir.

Trustee acquires ownership of the property in Hungary as a trustee.

This is currently only possible in Hungary if the current Trustee creates a new trust relationship under Hungarian law and purchases the property and manages the assets in question as an ad hoc trustee. In this case, the assets under management may include any number of assets, but the same ad hoc trustee may not manage assets under more than one trust deed. The disadvantages of this solution are the following:

• the trustee cannot thus perform trustee functions in further trusts in Hungary.
• in Hungary, the registration of the ad hoc trusts is carried out by the Magyar Nemzeti Bank (Hungarian National Bank – hereinafter: MNB).

The MNB’s interpretation of the law in this area is currently unknown, but based on its past practice, there is a strong possibility that if the ad hoc trustee carries out this activity on a commercial basis in another country, as in this case, the MNB will not register it as an ad hoc trustee, but will seek to enforce against it the rules applicable to commercial trusts in Hungary. However, in the present case, such a condition would impose on the trustee a financial, licensing and other burden which would far exceed the objective pursued, and it is not the purpose of the transaction to run a registered trust business in Hungary.

Trustee would set up a Hungarian company on the assets under management

In this case, the current trustee of the assets would, if its trusteeship permits, set up a company in Hungary which would be able to purchase real estate in Hungary without hindrance.

Advantages:

• The company formation procedure is quick and cheap. The company can be registered in about two weeks. The mandatory share capital is HUF 3M.
• The resulting company can easily acquire real estate, which can then also form part of the assets under management.

Disadvantages:

• The property included in the assets under management would not be owned by the trustee, but by the company, so the current trustee, even if through the proprietary company, would only indirectly exercise its ownership and other related (landlord, etc.) rights over the property.
• The maintenance of the company would entail additional tax and other costs and obligations.
• This solution may be useful for the acquisition of the property, but it does not necessarily solve the other issues of trust management (disposition of property, possible inheritance issues, etc.), as they are governed by a trust agreement on a different basis (Will trust). The company contract is not suitable for this purpose. It is therefore likely that the existing trust relationship would also need to be brought into line with the new situation, for which we do not know yet what options are available.

Trustee establishes a trust relationship in Hungary with private trust company

This new Hungarian trustee purchases the property and exercises the rights and performs the obligations set out in the new trust deed. In this case, the resulting company does not acquire ownership of the property directly, but participates as a trustee in an ad hoc trust and, under this trust, the property is purchased as the part of the assets under management.

Benefits:

• The company formation process is quick and inexpensive. It is quick and easy to set up a company. The mandatory share capital is HUF 3M. Establishing the trusteeship is also easy, but the lead time is approximately 60 days.
• The resulting ad hoc trust deed can regulate all rights and obligations that were included in the original Will Trust, as long as they do not conflict with Hungarian rules. As Hungarian law is quite broad in the case of trusts, it is unlikely that there would be any conflicts.
• The rights of the beneficiary (life tenant) and the prospective heir/remainderman can be protected more broadly.
• In this case the created trust would not be subject to any obstacles at the MNB and would be registered. The original (current) trustee’s business activities in England would not affect the registration of the newly created trust in Hungary.

Disadvantages:

• Compared to the current trust arrangement, this would also include an indirect solution to the original arrangement.
• There are costs and tax and other obligations associated with both the established company and the maintenance of the trust.

Protecting the rights of managed assets, life tenants and remainderman.

This can be most fully achieved with solution No 3, as it is the best way to protect (as in the original trust agreement) the protection of the assets and the rights of the above mentioned persons.

Protection against claims

Under Hungarian law, the trust property is protected against all claims arising out of the trustee’s obligations outside the trust and against all claims not related to the trust property. The use of the property by the life tenant would be fixed in the resulting Hungarian trust deed, similar to the current Will Trust, so that he would be protected against claims by the wife and the release of the value of the property to the remainderman would be guaranteed.

Case of the death of the life tenant

In the event of the death of the life tenant, the assets held in trust would be released to the heir/remainderman on the basis of the trust deed. Provided that the arrangements are in line with Hungarian law, there are no particular difficulties with regard to the release/sale. The seller would be the trustee, who would release the proceeds of the sale to the remainderman as beneficiary. There are no different rules for this type of sale. The place of residence of the life tenant is irrelevant to the above issues and should be regulated in the trust deed in his or her best interests. In this case, the life tenant does not have to live in Hungary.

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Disclaimer: All content within this column is provided for general information and educational purpose only, and should not be treated as a substitute for tax or legal advice. If you need more information about services to fund managers, private trustees and our fiduciary asset management services, please contact us or arrange a meeting with our experts here.