Finance Bill opens door to tax efficient property funds

The government has proposed relaxing the tax rules on Property Authorised Investment Funds (PAIFs) and REITs in a move which may increase the number of funds in this space.

In draft legislation for the Finance Bill, HMRC revealed measures to make it easier for funds to convert to the PAIF tax regime.

The plans will see the government amend tax regulations to allow investors to exchange their units in a dedicated PAIF feeder fund for units in the PAIF and vice versa, without being subject to capital gains tax.

The move follows consultation with various property fund managers, as well as the Association of Real Estate Funds (AREF).

HMRC expects to make the changes in late spring or early summer next year, following further informal consultations on its draft proposals.

John Cartwright, the chief executive of AREF, said PAIFs benefit tax-exempt investors such as those investing through ISAs and pension schemes. He estimates £1.6m a year could be returned to end investors if the PAIF system is widely adopted.

The group said only three PAIFs have so far been launched, all of which have a high minimum investment, excluding retail investors.

However, mainstream property funds running an estimated £10bn of assets, have already laid the groundwork to convert to the PAIF structure as soon as possible, according to AREF.

It is now urging fund platforms to make the necessary changes to their systems to support PAIFs, making them more widely available.

The IMA has welcomed the move, with director Julie Patterson (pictured) saying: “The technical change to the PAIF regime will ensure ordinary retail investors will not suffer tax on their investments in property funds held in ISAs or SIPPs.

“The PAIF regime has for some time enabled institutional investors and wealth management clients to access this tax-efficient form of investing. It is right that it should be available to all types of retail investors.”

Meanwhile the Treasury has unveiled draft legislation on real estate investment trusts (REITs), opening them up to a wider pool of investors.

From April 2012, the government will remove the 2% conversion charge, allowing REITs to be listed on the AIM and PLUS exchanges or overseas, and will change the rules on how cash is treated as an asset. The move is intended to make the REIT structure more appealing to property funds.

A three-year grace period for converting companies to meet the ‘non-close’ company rule is also designed to make it easier for medium-sized businesses to split out their property investment operations and convert them into smaller REITs.