PropertyOct 29 2020

Govt mulls banning property funds from Isas

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Govt mulls banning property funds from Isas

The government is proposing a ban on new investments into open-ended property funds held within Isas if the changes to the funds’ redemption period floated by the City watchdog go ahead.

In a consultation paper published yesterday (October 28), HM Revenue and Customs said it was considering allowing existing investments in property funds to remain within the Isa but prohibiting the inclusion of ‘new’ investments in such funds.

The potential problem of open-ended property funds in Isas stems from the Financial Conduct Authority’s ongoing consultation on requiring investors to give a notice period — potentially up to 180 days — before their investment is redeemed.

This goes against current Isa legislation, which mandates that account holders be able to access the funds or transfer them to another Isa within 30 days of making an instruction.

The government is therefore proposing to prohibit all new investments into open-ended property funds within Isas if the rules floated by the FCA go ahead.

But in order to mitigate some of the impact on Isa holders, the government is eyeing a provision whereby those funds which are already in an Isa can remain in the account, despite having extended redemption arrangements.

Under one model floated by HMRC, existing property funds could be retained in the Isa but investors would be unable to make further investments into the funds.

The government’s alternative version would see investors be able to continue to add money into those specific property funds already held in the Isa, but investments in new, different, property funds would be prohibited.

However HMRC warned that while either of the approaches could address the tax implications for consumers, they would potentially introduce greater complexity for Isa managers where property funds form part of a mixed portfolio.

In the case of a Lifetime Isa — used to fund a house deposit — it was “unclear how an extended notification period could be accommodated” where the investor needed to withdraw the cash for a property purchase.

HMRC noted that Isa managers had effectively been accommodating extended redemption agreements since March 2020, when all ‘bricks and mortar’ property funds were suspended due to market uncertainty.

In order to get a clearer understanding of how the rules would affect Isa holders, the government is seeking data on the number of relevant property funds held in stocks and shares or lifetime Isas and the opinions of Isa holders and managers towards the proposed rule changes.

The consultation closes on December 13, 2020.

Oliver Creasey, head of property research at Quilter Cheviot, said: “While we see the consultation as marginally good news for Isa owners holding property funds as they don’t have to sell their existing investments, it is of limited value to them, and does nothing to help new property investors seeking to make use of the tax efficient vehicle. 

“Over time, the amounts held in property funds within Isas is liable to fall sharply. Many investors are likely to be put off by the FCA notice period, and even if they are not forced to sell out of the funds, we believe they are likely to choose to do so.”

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