Briefing
Investment Funds
October 2014
PAIF tension between property funds and platforms
As Property Authorised Investment Funds (“PAIFs”) become
Other taxable income, the second category of income
increasingly popular, the Tax Incentivised Savings Association
distributions, is treated for tax purposes as if the distribution
has reported on what it describes as a growing tension
were a payment of yearly interest. This is generally paid to
between industry bodies that are keen to take advantage of the
corporation tax payers without any deduction for tax, but for
available tax advantages of the PAIF structure, and platforms’
income tax payers is paid net of tax at the basic rate.
failure to support these funds.
PAIFs generally
Where an open-ended investment company (“OEIC”) invests in
a portfolio that comprises predominantly real property or shares
in UK Real Estate Investment Trusts (UK-REITS) and certain
Finally, dividend income distributions are exempt from
corporation tax and, for income tax, carry a one-ninth nonrepayable tax credit which satisfies basic rate tax liabilities,
but which requires payment of an additional amount by higher
rate taxpayers.
similar entities it can, subject to satisfying a number of other
Other tax benefits include no capital gains tax for investors
conditions, elect to be authorised as a PAIF.
and an exemption from stamp duty land tax (“SDLT”) on the
The main benefits to funds and their investors of the PAIF
regime are tax related. Generally, investors are taxed as if they
had invested directly in the underlying assets and therefore
conversion of an existing authorised fund into a PAIF. The
government is consulting on extending the SDLT exemption to
the conversion of an unauthorised fund into a PAIF.
receive benefits not otherwise available to most other collective
As a result of this beneficial tax regime, PAIFs have fast become
investment schemes that invest in rental property. These tax
the preferred structure for property portfolios. Recent notable
benefits are achieved by ring fencing income received from the
conversions to the PAIF structure have been the £3.4bn M&G
fund’s property investment business, (e.g. rentals) and then
Property Portfolio, the £986m Standard Life Investments UK
splitting the remaining types of income between “other taxable
Property fund and the £1.4bn L&G UK Property trust.
income” (e.g. interest and taxable dividends) and exempt
However, the perceived lack of interest from platforms to
dividend income. Investors, therefore, receive three different
introduce support for PAIFs has proved frustrating for the
types of income, each of which is taxed differently – a structure
industry, the Treasury and HMRC, with the Chief Executive of
that is designed to separate retail investors from corporate
the Association of Real Estate Funds, John Cartwright, recently
holders. The net result of this, however, is that platforms
calling for platforms to take up the interest in PAIFs and to
struggle to cope with the administrative burden of accounting
properly implement them into their systems.
for each type of income received and distributed by the funds.
Taxation of PAIF distributions
The three different types of PAIF distributions are as follows:
Property income distributions (“PIDs”) are taxable as the
income of a UK property business. These PIDs are paid to
income tax paying investors net of tax at the basic rate (thereby
creating an extra liability for higher rate taxpayers). PIDs are
also chargeable to corporation tax in the hands of a corporation
tax payer, though the taxpayer in this instance will receive the
PID in gross form.
The timing would seem to be right, with PAIFs poised to become
increasingly popular as real estate investment continues to
increase with net retail sales of £242m in August 2014.
Burges Salmon advised on the incorporation of the first
authorised PAIF and our Funds team regularly advises on the
authorisation and ongoing management of regulated funds.
If you would like advice on the above or with regards to
PAIFs generally please contact Nigel Popplewell, Tom
Dunn, Nicola Manclark or Victor Ondoro.
continued overleaf
Contacts
For further information, please contact:
Nigel Popplewell
Tom Dunn
Partner, Tax
Partner, Funds
+44(0)117 902 2782
+44(0)117 902 7796
[email protected]
[email protected]
Nicola Manclark
Victor Ondoro
Senior Associate, Tax
Consultant, Funds
+44(0)117 902 2743
+44(0)117 307 6051
[email protected]
[email protected]
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