Introduced to the UK in 2008, Paifs separate their income into three streams: rental, interest and dividend income.
Unlike Oeics or unit trusts, which require fund managers to withhold 20 per cent of their rental income for tax purposes, both rental and interest income (gained on underlying bond or equity holdings) are paid out gross of the 20 per cent corporation tax to qualifying investors. If the fund is held in an Isa or pension wrapper, that income will be tax-free – a significant benefit for many retail investors.
For investors who are ineligible or unable to access the Paif, they are able to invest via a feeder fund and will have their income taxed at source; paid out net, with the requirement to reconcile their tax position at a later date.
According to the IMA, of the 35 retail funds in its Property sector, those which have converted to the new structure include: M&G Property Portfolio, Kames Property Income, Standard Life Investment UK Property Paif, Hearthstone UK Residential Property, managed by Thesis, the Mansion UK Student Accommodation Income and Growth, Ignis UK Property and Legal & General UK Property funds.
Henderson and Threadneedle are said to be making steps towards converting, and John Cartwright, chief executive of Aref, the Association of Real Estate Funds, says more will follow this year.
While there are technical and operational issues involved with making the conversion, the benefits seem clear – why miss out on 20 per cent yield uplift?
Michael Barrie, director of fund management at L&G Property and co-fund manager of the L&G UK Property fund explains: “Paifs distribute their income gross, so you could expect a gross tax statement, which would be zero per cent if you held it in your Isa, for example.”
Access seems to be a hurdle, with some of the major platforms still not geared to facilitating the three income streams.
Market forces look set to apply continued pressure on fund management groups and platforms to embrace the more tax-advantageous structure.
Bestinvest senior research analyst Simon Moore says if there were no Paifs available to existing unit holders in an Oeic, the investor might be forced into the feeder fund. “While there would be then no change to their income, it would be like-for-like – you wouldn’t get the benefit of the higher dividend, which is the whole point of doing it,” he says.
Many platforms have argued the sector’s relatively small size is behind their lack of readiness. But Mr Barrie is confident the large AUM in some of the already-converted funds will accelerate the process.
With the additional paperwork about demonstrating investor eligibility and a possible need to switch platforms, those players offering clients the path of least resistance look set to win.
Sam Shaw is a freelance journalist
Adviser views: Property and piafs
David Penny, managing director, Invest Southwest:
“Property remains a vital element of an asset-allocated spread investment portfolio. Paifs in principle are a tax-efficient method of collective investment, and as ever with collectives, one has to be very careful to select one in line with investor requirements.”
Carl Melvin, director, Affluent Financial Planning:
“We use the L&G property fund which has just converted to Paif a few weeks ago. I don’t think clients have an issue with this, as the change is to ensure greater tax efficiency and compliance. It is purely a structural issue. So, in short – a non-event.”
Jonothan McColgan, director, Combined Financial Strategies:
“Looking at the reasons for Paif conversions it seems these structures will allow property funds to be finally treated as the income producing investments that they are.
“This means non-tax payers and Isa investors will be allowed to reclaim the first 20 per cent of income tax that they were not allowed to previously. However you need to be careful where only Paif feeder funds are offered by platforms.”
