Wednesday 30 March 2016
Finance Bill paves the way for a new generation of property funds to flourish but will adversely affect the private rented sector
The Treasury has paved the way for a new breed of property funds to finally get off the ground with the removal of a roadblock stamp duty land tax (SDLT).
The change, in the Finance Bill 2016, is a new seeding relief for property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs), enabling existing property funds to switch to using more efficient alternative structures without a tax hit.
The new relief is likely to fire the starting gun on a wave of property fund conversions to PAIFs and CoACSs, which offer investors the same outcome for tax purposes as direct investment in property. Currently, investment in most property funds does not offer tax neutrality as tax can be levied more than once. PAIFs and CoACSs allow investors to experience better outcomes.
Unfortunately, the mechanics of the clawback of relief do not accommodate the commercial realities of unit-linked insurance funds. It remains to be seen what impact this will have on take-up of the relief.
In addition, new rules for CoACSs remove confusion as to how these schemes should be treated for SDLT. This has been a major obstacle and will mean that property investment will become a viable option for CoACSs for the very first time.
However, the positivity of these moves is offset by increases in SDLT rates.
The reform of SDLT rates on non-residential property will adversely impact institutional investors. This will reduce returns for pensioners and individuals saving for the long term.
The 3% surcharge on investment in residential property will discourage institutional investors, in turn adversely impacting the supply of rental property.
Commenting on the Budget announcements, John Cartwright, Chief Executive of the Association of Real Estate Funds, said:
“Whilst we are pleased that seeding relief is being introduced for PAIFs and CoACSs, and that the SDLT treatment of CoACSs is being clarified, we are disappointed with some of the other measures announced in the Finance Bill and Budget.
“The 1% increase in SDLT rate on commercial properties valued at £1.05m and over will hit institutional investors hard. At a time when pensioners and other savers need income producing assets, an additional tax on property will reduce their returns.
“The government’s decision to subject institutional investors to a 3% SDLT surcharge on residential property is a disincentive to invest in that type of property. Good quality rented property is in short supply and this move will exacerbate that problem.
“On the positive side, the PAIF and CoACS regimes offer tax efficient structures in property enabling the best possible returns for investors. We expect to see a new wave of PAIFs and CoACSs being created. Less tax efficient vehicles will be able to convert without being hit with a tax bill. We are, however, disappointed that the government has not listened to industry calls to accommodate unit-linked funds within these new provisions.
“We will continue to work with our members and government to ensure investors have the best product set available.”
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About The Association of Real Estate Funds:
- The Association of Real Estate Funds (AREF) is the voice of the real estate funds industry.
- We are recognised by policy makers, regulators, tax authorities and other official organisations as the leading spokesperson for real estate and therefore have the ability to influence the way our industry evolves.
- Investors and advisers are aware of the high standards our members adhere to, both in transparency and corporate governance, therefore enabling us to promote their confidence when they invest in real estate.
- Full members have a collective NAV of circa £66bn under management* and all are benchmarked using the leading AREF/IPD UK Property Fund indices (PFI).