Draft Finance Bill 2012 - REITs and PAIFs

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21 December 2011

Following on from our recent briefing on the proposed changes to the REIT regime, the draft clauses in the Finance Bill 2012 reflect the expected changes listed there. The changes are welcome improvements to the regime and we expect them to encourage wider use of REITs. They will apply on or after the date that the Finance Bill receives Royal Assent.

In addition, on the same date that the Finance Bill clauses were published, HMRC also announced that changes would be made to the Property Authorised Investment Fund (PAIF) regime. Next year, the government intends to make regulations designed to facilitate the conversion of existing funds into PAIFs. The regulations will allow investors to exchange their units in a dedicated PAIF feeder fund for units in the PAIF and vice versa without incurring a capital gains tax charge. This is expected to assist conversions in the following ways:

  1. To allow investors who invest in a new PAIF to swap their investment in a dedicated feeder fund for a direct investment in the PAIF once the PAIF can be supported by the platform through which those investors ordinarily invest.  Many platforms cannot currently support PAIFs but once they can, this will enable investors to swap back to a more tax-efficient direct investment;
  2. To manage the corporate ownership condition (i.e. that a corporate investor cannot beneficially own more than 10% of the PAIF) by allowing a corporate investor to swap its interest in the fund for an interest in a feeder fund, through which its percentage shareholding can be more easily managed.

To date only three PAIFs have been authorised by HMRC and this is due, in part, to the difficulty of administering the vehicle. Burges Salmon has unrivalled experience in advising on PAIFs, having advised on the establishment of one of the three existing PAIFs and been appointed as the retained solicitor for another (the CB Richard Ellis UK Property Fund, which is also a direct contribution pensions property fund). Our view is that these proposed changes are welcome and it is hoped that they will encourage more funds to convert into the regime.

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