HMRC opens door for property funds to convert into paifs

The government has laid the foundations for more property funds to convert to property authorised investment fund (Paif) status by changing the tax incurred on such a switch.

Asset managers had previously been subject to stamp duty land tax (SDLT) when ‘seeding’ a new Paif, which entailed moving an existing property portfolio into a Paif wrapper.

But HMRC today announced that it would introduce “seeding relief” for specialist property funds, easing the impact of the Paif conversion and encouraging more firms to convert to the structure.

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In addition to Paifs, the relief will apply to co-ownership authorised contractual schemes (CoACSs), which are ‘tax-transparent’ specialist property funds set up under rules devised in 2013.

The government had set out its plans to consult on the SDLT in the Budget earlier in 2014 and had consulted the industry over the summer.

HMRC said any changes arising from this new measure would “be legislated for in Finance Bill 2016”.

A spokesperson for Kames Capital said the new measure was “potentially very exciting, particularly for older property funds and unit-linked property funds”.

He said if the change goes through it will probably spark “a raft of conversions” from these older property funds into the Paif format, because “Paifs are more tax efficient”.

John Cartwright, chief executive of the Association of Real Estate Funds (AREF), said the move by the chancellor was a “much needed removal of double taxation” which could help retail investors.

“Real Estate can be a key asset class to help people build up their pension pot,” he said.

But he expressed disappointment the measure was not being implemented sooner.

“However, the deferral of the measure until 2016 will prevent a number of funds being launched in the UK in the meantime and could represent a lost opportunity for the industry and the government,” he said.

“We would therefore urge bringing forward the measures to the Finance Bill 2015, that will enable a number of fund promoters to put property into UK funds and not have to turn to offshore fund centres.”

Under the current SDLT rules when a Paif is launched by transferring existing property portfolios as seed assets, it incurs a 4 per cent tax.

This has deterred the industry from setting up new Paifs and therefore investors are not getting the full benefit and range of the product, Mr Cartwright said.