Pressure is mounting on platforms to develop the systems needed to list property authorised investment funds (Paifs), as investors are being “disadvantaged” by having to invest in them via feeder funds.
Paifs are a fund structure designed to make investing in property more tax efficient, removing the 20 per cent tax on income that is automatically levied on conventional property funds.
Most platforms do not yet have adequate IT systems in place to deal with Paifs, so are instead listing ‘feeder funds’, through which investors can access the Paif.
But the income through the feeder fund is still taxed at 20 per cent, removing the benefit of using a Paif, so advisers are now calling on platforms to take action.
Peter Matthew, managing director of Jacksons Wealth Management, said the issue was “very significant”, adding it could make investing in Paifs “become a fairly pointless exercise” if platforms didn’t upgrade their systems.
“It is a logical step for platforms as there is a clear benefit to customers,” he said.
Andrew Alexander, head of investments and product strategy at Three Counties, said the tax benefit “is the only reason why you would go for a Paif”.
“If using a platform eradicates that, then it needs to change,” he said.
Graham Bentley, managing director at investment consultancy gbi2, said platforms have known about the issue for more than two years but said it was not high on their lists of priorities.
“Why hasn’t anything been done about it?” he asked. “The RDR will have got in the way but wiser people will have run concurrent projects.”
The issue has come to the fore because property funds have been growing in popularity in the past year. Data from the IMA showed its Property sector, which contains both direct property and property share funds, had the largest net inflow of cash of any IMA sector in May of £491m.
And property funds have been increasingly converting to the Paif structure, led by M&G Investments, Standard Life Investments and Legal & General Investments.
John Cartwright, chief executive of the trade body Association for Real Estate Funds, said: “It is almost certain that all funds will have to convert [to a Paif] because there is a competitive disadvantage to not converting.”
But the inability to list on most platforms is eroding that advantage, which Mr Cartwright said means investors are being “disadvantaged” in feeder funds.
Philip Nell, manager of the Aviva Investors Property Trust, said the increasing number of Paifs would put pressure on platforms to upgrade their systems.
“As more Paifs come online and investors get more savvy and realise they are not getting the full distribution, they will become more discerning,” he said.
Meanwhile, David Wise, investment director on the Kames Capital property team, said while it has mainly been property fund managers who have been pushing for platforms to list Paifs, “the regulators are starting to push platforms as well”.
The trouble with ‘triple streaming’
Property authorised investment funds (Paifs) were first introduced in the 2008 Budget, in order to remove the 20 per cent tax on income incurred by investors in property funds.
One restriction imposed on Paifs was that no more than 10 per cent of the fund could be held by a single investor, in an effort to stop investors exploiting the product’s tax benefits.
Given that this posed a problem for new funds that required seed money from one or two significant backers, ‘feeder funds’ were designed to allow an investor to hold more than 10 per cent.
But these feeder funds are now used on platforms that cannot handle Paifs.
The issue is that Paifs pay out their income in three distinct streams: rental income from properties, dividends from property shares and interest from cash.
Most platforms do not have the infrastructure in place to deal with this ‘triple streaming’ of income.
And Aviva Investors’ Philip Nell pointed out the tax paid by using feeder funds could wipe as much as 70 basis points from an investor’s annual return.
Investment Adviser understands three platforms that can currently list Paifs are: Transact, Alliance Trust Savings and Ascentric. Cofunds, FundsNetwork, Novia, Nucleus and Skandia recently confirmed they were not going to list Paifs imminently.
However, Kames Capital’s David Wise said most platforms are currently working on listing Paifs and he thinks “most will have Paifs within a year”.
