Reserved Investor Fund proposals offer some tax advantages

Corporate real estate specialist Robert Moir and property tax specialist Andrew McCarthy, both of Pinsent Masons, were commenting after the Treasury and HM Revenue & Customs (HMRC) opened a consultation on the RIF(CS) (45-page / 302KB PDF).

According to the proposals, the RIF(CS) would be an unauthorised fund, which would mean it was open to a bigger range of possible assets and investment strategies than an authorised fund. The Treasury and HMRC are seeking views on proposals for the scope of the RIF(CS) and the design of a tax regime for the fund. Their consultation will close on 9 June.

Preliminary discussions between HMRC and industry stakeholders indicated that the intended main use of a RIF(CS) would be holding real estate, although it could be used to hold other assets.

HMRC intend for the tax regime for RIF(CS) to largely replicate the tax rules for Co-ownership Authorised Contractual Schemes (CoACS). The government’s objectives for the RIF(CS) tax regime are tax neutrality and to provide investors with certainty as to their tax treatment. In respect of the former, a RIF(CS) would not be a taxable person for direct tax purposes and, consequently, any income received by a RIF would arise directly to investors such that an investor in a RIF(CS) will be in a broadly similar tax position as if they had invested in the underlying assets of the fund directly.

The proposals are not only targeted at retail investors, they are also potentially relevant to institutions such as pension funds and insurance companies as well as other investor categories, such as certified high net worth investors.

To ensure that the non-resident capital gains tax (NRCGT) regime still applies as intended where the underlying assets of the RIF(CS) are UK land, HMRC has proposed a regime of “restricted” RIF(CS) in certain circumstances. This includes where at least 75% of the value of the RIF(CS)’s assets is derived from UK property, in which case the RIF(CS) is “UK property rich” for the purposes of the NRCGT regime and tax is payable by investors on a disposal of units.

The restricted RIF(CS) regime would also apply if all investors in the fund are exempt from tax on gains, such as is the case with certain pension funds, or if the fund does not directly invest in UK property, or in UK property rich companies, with the possible exception of minor interests in UK property rich collective investment vehicles.

The proposals follow an announcement made by the UK government in its Budget 2020 of a review of the UK’s funds regime with a view to identifying options which will make the UK a more attractive location to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs.

Robert Moir said: “The UK real estate market remains an attractive investment destination in the long term.  In particular, we foresee demand for office refurbishments and investments, driven by changing work patterns, ESG and reputational considerations, as well as repurposing and the redevelopment of cities to meet net zero commitments. Also, developments addressing demographic changes such as build-to-rent and affordable housing, student, healthcare and senior living. However, with borrowing currently more expensive, and inflationary pressures on construction budgets and labour costs, any opportunity for real estate investment to be unlocked in a tax efficient manner is to be welcomed.”

Andrew McCarthy said: “HMRC appears to be consulting thoroughly with a view to making any RIF(CS) regime as attractive as possible. In particular, the potential wide asset class that could be held by RIF(CS) and the fact that HMRC is consulting on the tax rules to apply where a RIF(CS) invests in other fund vehicles suggests that they have the potential to be of broader application than simply real estate and therefore of relevance to a wide range of investors.”

“The ability to transfer units in a RIF(CS) free of stamp duty land tax and to access seeding relief compares favourably with existing structural options for UK real estate. However, unlike an authorised contractual scheme, management of a RIF(CS) will not be VAT exempt so they may prove to be attractive only for commercial property investment,” McCarthy added.