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UK government consults on stamp duty land tax relief on properties purchased by investment funds

Out-Law News | 23 Jul 2014 | 11:15 am | 3 min. read

Relief from stamp duty land tax (SDLT) could be limited to larger transactions under proposals being considered by the UK government.

The plans could limit SDLT relief when properties are 'seeded', or transferred from an existing property portfolio to a new investment structure, to commercial transactions valued above £100 million, or residential transactions involving 100 properties or more.

The government has asked the asset management and property industries for their views on whether changes should be made to the SDLT treatment of the seeding of property authorised investment funds (PAIFs) and the wider SDLT treatment of co-ownership authorised contractual schemes (CoACS), as announced as part of the 2014 Budget. The indicative thresholds are included as part of a proposed design for a new relief if taken forward, and are designed as an anti-avoidance measure.

SDLT expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the proposed thresholds could heavily restrict the application of any new relief.

"HM Revenue and Customs (HMRC) remains concerned about any new relief being used for avoidance, but the suggested thresholds would limit the PAIF seeding relief to the most significant PAIF launches," he said. "This could inhibit the use of PAIFs as early stage investment vehicles and is probably not necessary given the suggestion of a targeted avoidance provision and specific anti-avoidance measures aimed at residential occupiers."

"The Treasury is using this consultation to gather evidence on the effect of the absence of a seeding relief on the property investment market. It will be important for the industry to respond on this, as it seems that the Treasury remains to be convinced on the need for new reliefs in this area," he said.

A PAIF is a type of open-ended investment company which is authorised by the Financial Conduct Authority (FCA). It was introduced in 2008 as a way of bundling a mixture of residential and non-residential property, shares in UK Real Estate Investment Trusts (REITS) and shares in similar offshore entities into a single investment portfolio. There are currently eight PAIFs in existence, with a total of over £6 billion of assets under management.

Currently, a PAIF must pay SDLT at the usual rate on property that it purchases or that is transferred to it in the majority of cases. There is therefore liability for SDLT when an existing property portfolio is 'seeded', or transferred into a new or empty PAIF, even though the economic ownership of the property portfolio has not changed. The UK government is investigating the case for 100% relief from SDLT in certain circumstances in order to encourage more property funds to set up in the UK and facilitate greater collective investment in UK property.

According to the consultation, the new relief would only apply to PAIFs and potentially to CoACS. It would be available for the transfer of both residential and non-residential property, and is designed to apply only to the initial seeding of a PAIF. The government said that it believed that the main users and beneficiaries of this relief would be life companies and pension funds, although its application would not be restricted to only these types of investors. However, all the units being transferred into the PAIF would need to be owned by the same entity or group of entities after the transfer.

The 'portfolio test' being considered by the government would limit application of the relief to transactions where a certain number of properties are transferred as an anti-avoidance measure. Its indicative thresholds of £100m and/or a minimum of 10 discrete non-residential properties, or 100 residential properties, are based on "the government's beliefs about the size of existing property portfolios and the types of properties that may be transferred into PAIFs", according to the document. The thresholds would be set at a level to prevent the use of PAIFs as a means of 'buying' individual properties, according to the consultation.

Although SDLT is currently a UK-wide tax that is centrally set and collected, it will cease to apply to transactions involving property in Scotland when the new Land and Buildings Transaction Tax (LBTT) comes into force next April. However, a PAIF or CoACS set up in Scotland and investing in property in England, Wales or Northern Ireland would still be subject to the SDLT rules, including the availability of a seeding relief. Wales is also due to establish its own SDLT equivalent.