Guest view: UK fund managers – seize the RIF opportunity

The Spring 2024 Budget saw a welcome announcement from the UK government on the reserved investor fund (RIF). The government confirmed it is proceeding with tax rules to introduce the RIF and has since begun legislating through the Spring Finance Bill 2024. Assuming the government introduces the RIF tax rules, UK fund managers will be entitled (hopefully within the next few months) to utilise this new investment structure that plugs an important gap in the UK’s investment fund offering.

Asset managers, from SMEs to larger firms, will no longer be forced to go offshore, with all of the associated challenges, and costs, of dealing with multiple legal, tax and regulatory regimes. The RIF also compares favourably with existing onshore ‘authorised’ fund structures. For example, while authorised funds must be open-ended, the RIF can be a closed-ended or hybrid structure. Additionally, the RIF offers greater flexibility, including redemption windows tailored to the liquidity matching. A further advantage is that the RIF will be subject to a lighter regulatory regime (which in turn will reduce launch and operational costs).

What is the RIF?

The RIF is modelled on the co-ownership authorised contractual schemes (CoACS). For regulatory purposes, it must be classified as a UK alternative investment fund (AIF). It will therefore have a UK alternative investment fund manager (AIFM), with small authorised or registered AIFMs being permitted.

Eligible investors will include professional investors and large investors (defined as investors committing at least £1m). Certain types of retail investor may fall within the large investor category (for example, certified high-net-worth and sophisticated investors and self-certified sophisticated investors). Because the RIF is an unregulated collective investment scheme, it will fall under the marketing rules of the Financial Conduct Authority (FCA) for non-mass-market investments so that mass-marketing restrictions apply and suitability assessments of retail investors will be required.

Given its co-ownership structure, a RIF will need to have at least two investors. The AIFM will make decisions on behalf of the RIF (and, effectively, its investors) about the acquisition, management and disposal of assets. The AIFM will also make decisions regarding risk management. Each RIF will also have a depositary.

It is likely that the RIF’s principal constitutional documents will be both:

• A deed, signed by the AIFM and the investors;
• Suitable admittance documentation to allow investors to acquire interests in the RIF.

The AIFM will need to act in accordance with the provisions of the RIF deed (and the terms of its engagement as manager) but will not be subject to all the restrictions that would otherwise apply in the context of managing an authorised fund. The RIF will also benefit from the flexibilities of being an unregulated collective investment scheme.

With no need for prior application to, or approval from, the FCA or registration with Companies House, the RIF will be an attractive solution for those seeking an accelerated speed-to-market launch.

Tax

The tax treatment of the RIF is modelled on the existing CoACS legislation. As such, the RIF is transparent for income-tax purposes and transfers of RIF units are exempt from stamp duty and stamp duty reserve tax.

In terms of the taxation of chargeable gains, the RIF will replicate the CoACS treatment (opaque for UK chargeable gains purposes) provided the RIF operates within one of three ‘restricted’ RIF categories:

• UK property-rich RIF, where at least 75% of the value of the RIF’s assets derives from UK property (based on the UK’s non-resident capital gains tax rules);
• RIF investors are UK tax-exempt; and/or
• RIF’s asset base does not include UK property nor interests in UK property-rich companies.

In other words, so long as the RIF remains within one of the three categories, investors in the RIF are not subject to tax on chargeable gains on disposals by the RIF of underlying assets but investors are subject to tax on realisation of their RIF units.

The restricted RIF categories are intended to ensure that both UK and non-UK investors are subject to UK tax on gains made on disposals of UK property and UK property rich vehicles.

From a stamp duty land tax (SDLT) perspective, there should be no SDLT on transfers of units in a RIF – but only while the RIF remains within one of the three restricted categories. The RIF will also benefit from a seeding relief from SDLT (modelled on the existing CoACS relief).

The RIF must also meet a number of general conditions, such as an ownership condition based on genuine diversity of ownership or a non-close test.

The restricted RIF framework is a pragmatic way forward for the RIF legislation, particularly as the UK property-rich category can be utilised by UK real estate fund managers. From an operational perspective, restricted RIF compliance can be monitored on a regular basis (as already happens in relation to monitoring ongoing conditions for real estate investment trusts).

Innovative opportunities

As key architect and lead campaign advocate of the RIF, I hope the RIF will be a conduit to attract capital and stimulate growth in the UK economy. UK managers consider the RIF can act as a valuable new catalyst by creating jobs, levelling up (for example, via town centre regeneration projects) and accelerating our nation’s infrastructure and green industrial revolutions.

I am grateful to the government and regulatory officials who have led the UK funds regime review project for their constructive engagement with industry, and share the government’s confidence that “the RIF will be a fund vehicle which serves as a valuable addition to the UK’s fund range”. Thanks to these collective efforts, the RIF will contribute to achieving a key objective of the review by making “the UK a more attractive location to set up, manage and administer funds”.

UK managers – seize the opportunity and use the RIF.