Melville Rodrigues considers the important choice facing UK fund managers

Melville Rodrigues

Melville Rodrigues is head of real assets advisory at Apex Group

The reserved investor fund (RIF) and the unlisted, or private, real estate investment trust (REIT) – as unlisted funds that can attract institutional investors for UK real estate strategies – have been introduced as part of the UK government’s funds regime review. In the March 2024 HM Treasury/HMRC publication summarising the responses received from stakeholders to the government’s RIF consultation, the government confirmed it is proceeding with tax rules to introduce the RIF. It has since begun legislating through the Spring 2024 Finance Bill and published draft tax regulations for the RIF.

Assuming the government introduces the RIF tax rules, UK real estate fund managers will be entitled to utilise the RIF as an onshore structure, when in the past they have had to go offshore for equivalent vehicles. Managers, including those who wish also to enhance their ESG credentials and consign to history regular flights to offshore jurisdictions for board meetings and substance purposes, must then consider the opportunities presented by these two structures.

In my role as the key architect and lead advocate of the RIF, I have often been asked how managers and institutional investors should choose between a RIF and a REIT (assumed to be onshore – alternatively, a REIT could operate with a technical listing on TISE). In my view, each has its own appeal – neither the RIF nor the REIT is a ‘one size fits all’ model. It also is possible to take a combined approach if, as appears to be the government’s intention, the relevant rules allow RIFs to invest in REITs and vice versa. Managers and investors will therefore have to decide these issues on a case-by-case basis.

To help managers and investors determine which structure to use, the high-level assessment below can be applied in each individual case.

Tax structure

The RIF is transparent for the purposes of UK tax on income. This means that investors are liable for tax on the income of the fund on an arising basis in accordance with their own circumstances. For capital-gains-tax (CGT) purposes, investors would be treated as holding an interest in the units of the RIF, but the RIF itself is not chargeable to CGT.

A REIT, by contrast, is a company, or the principal company of a group, in each case carrying on a property rental business and is tax-exempt on income and gains associated with that business (but subject to corporation tax on income and gains associated with any other business), with investors bearing the tax on distributions of those exempt profits/gains from the REIT (for non-UK investors, this is primarily via withholding tax on dividends from the REIT, currently at 20%, although lower rates – generally 15% – could apply under an applicable tax treaty).

A RIF is required to meet certain compliance conditions, including falling into one of three ‘restricted RIF’ categories. A REIT has to meet distribution and other compliance conditions (see RIF and REIT conditions box).




Tax-transparent unauthorised contractual scheme. Not chargeable to CGT. AIF and collective investment scheme 

Company exempt from tax on property business profits


Governing documentation

RIF deed

Memorandum and articles of association

Investor interest




Flexible in accordance with RIF deed

90% of property income profits must be distributed each year

Gearing requirement

Flexible in accordance with RIF deed

Cannot have excessive gearing and debt finance must be broadly on ordinary commercial terms

Permitted investors: 

Professional or high-net-worth individuals with £1m commitment. RIF must be diversely owned

If unlisted, at least 70% ownership by institutional investors – certain institutional investors will also need to be diversely held


UK AIFM and UK depositary – needs UK AIFM  and UK depositary as RIF is an AIF and collective investment scheme

Board of directors and (may be) an AIFM if REIT is an AIF

Other main UK tax-related conditions


Within one or more of three restricted RIF categories:

• UK property-rich RIF: at least 75% of the value of the RIF’s assets must be derived from UK property;

• RIF investors are UK tax exempt;

• RIF’s asset base does not include UK property/interests in UK property-rich companies.


All of the following:

• Property rental business must represent at least 75% of the REIT’s profits and assets, and include at least one commercial property worth at least £20m or at least three properties with no one worth more than 40% of the total;

• REIT must be UK resident;

• Corporate shareholders holding 10% or more can cause the REIT to suffer a tax charge, although this can generally be managed through structuring.

In summary, if both RIF and REIT conditions can be met, then consider the relative merits of each (including expected fund flows and tax analysis) as well as the responses to these questions:

  • Which is more efficient to launch and operate?
  • What is the main investor class?
  • Are seed investors contributing directly held UK real estate?

Let me explain.

Launch and operational efficiency

Both have speed-to-market advantages. In the case of the RIF, this would involve the manager – operating as a UK alternative investment fund manager (AIFM) – and a UK depositary signing a RIF deed and admitting two initial investors. The RIF is then up and running.

Operational efficiency would need to be assessed case by case, given applicable compliance requirements under the RIF conditions and REIT conditions.

Main investor class

The REIT has the following attractions:

  • A REIT can ‘cure’ a latent gain if a company owns UK real estate. It is common in the UK market for the purchase price to be reduced to reflect the tax which would be payable on the gain that a property holding company would realise (the latent gain) if it were to sell the property at market value. Subject to anti-avoidance rules to stop abuse, a REIT can effectively remove a latent gain, which may improve pricing on a sale of the company by the REIT.
  • In effect, a REIT converts its exempt income and gains (which would otherwise be subject to corporation tax, currently at 25%) into dividend income for tax treaty purposes – which is subject to withholding tax (currently at 20%), save for certain exceptions. Non-UK resident investors may be entitled to reclaim some or all of the withholding tax under a double tax treaty. This could facilitate a reclaim of withholding tax to reduce the effective rate of UK tax on a non-resident corporate investor’s share of the REIT’s tax-exempt profits to less than 20% (typically 15%) or even nil in some cases, versus the current UK corporation tax rate of 25% in the case of a RIF returns.

However, UK tax-exempt local authority and other institutional pension schemes may prefer the RIF on account of it being more straightforward compared with the REIT and compliance with the REIT conditions.

Seed investors contributors of UK real estate

The RIF will benefit from stamp duty land tax (SDLT) seeding relief (subject to certain conditions). This relief could be a catalyst for RIFs being launched with UK direct real estate holders exchanging their holdings for RIF investor units free of SDLT. The real estate holders may prefer the diversified RIF investor return. They may also appreciate that fact that under a RIF the responsibility for managing the holdings will be delegated and they will no longer bear the specific risk associated with retaining the holdings as direct investments. The REIT does not enjoy this seeding relief and therefore could suffer a 5% or more SDLT cost on portfolio seeding.

Other key UK tax comparatives

As may be seen from the box, there are certain similarities between the two structures. However, with respect to assets and activities there are also various differences between the tax requirements that apply to a RIF (operating within the UK property-rich restricted RIF category) and those that apply to a REIT.

A REIT would need to:

  • have at least 70% ownership by “institutional investors” to dispense with the listing requirement (which could include a technical listing). This may include ownership that is indirect, subject to specific ‘tracing’ rules; and
  • manage holders of excessive rights issues (non-resident company investors holding 10% or more of the shares in the REIT), but this is not uncommon and a recent change in law in February 2024 may simplify this further in relation to investors in some jurisdictions.

“Institutional investors” here has a specific definition that is narrower than the term might suggest. It includes, for example, most UK and overseas pension schemes, investors with sovereign immunity from UK tax, long-term insurance businesses and widely-held funds that meet certain additional criteria. A REIT will therefore be a viable option only if the investor base is expected to meet this requirement. In the case of RIFs, the government has indicated that a RIF will need to meet one of two conditions designed to ensure that the RIF is “widely held”. Those conditions will be modelled on legislation that is closely aligned to the equivalent conditions for certain types of institutional investor for an unlisted REIT.

In addition:

  • a REIT may have non-core residual activities, which could complicate the tax position and create tax leakage (which is another reason why a REIT is typically used only where the investment strategy does not create material income from such “residual” business);
  • certain life insurance companies may establish group REITs ensuring that they can invest in UK property-rich companies without suffering double taxation.

In terms of restrictions on finance costs, a REIT is itself subject to the corporate interest restriction (CIR) rules (which can have the effect of increasing the property income distribution (PID) that must be paid to shareholders), whereas for a RIF CIR restrictions may apply at the investor level. A REIT is also subject to a strict financing cost ratio requirement (with a potential tax charge in the REIT if breached), which can be a real restriction on the level of debt a REIT can take on, even where all debt is from external lenders.

In order to achieve the tax benefits for UK-exempt investors (in particular the lack of UK tax on income) a RIF would need to own UK real estate directly or via tax transparent vehicles. This would mean that if a RIF acquires UK real estate via a company, it would need to de-envelope the UK real estate. In contrast, a REIT has more flexibility to acquire, hold and sell UK property indirectly via a company.

From the perspective of UK fund managers wishing to pursue international (non-UK) real estate strategies, the combination of (a) a RIF (within the restricted RIF category which may not invest in UK property) and (b) a UK qualified asset holding company (QAHC) could offer much potential. The investor diversity of ownership conditions that apply to the RIF and QAHC are generally aligned.

There are also further UK tax considerations:

Stamp taxes – in addition to the RIF benefiting from SDLT seeding relief, a purchaser of RIF units pays no stamp taxes or transaction tax. By comparison, the purchaser of shares in a REIT that is structured as a UK-incorporated company pays 0.5% stamp duty (although stamp duty should not be payable in practice if the REIT were incorporated as an ‘offshore’ company; however, it would need to be UK tax resident). 

A REIT may facilitate the disposal of underlying UK property without an SDLT charge through the disposal of the shares in the property company holding the relevant property.

VAT the RIF and REIT are treated in effectively a similar way for VAT purposes.

Unfortunately, the government has announced that it is not progressing with industry requests to zero-rate fund management services to UK funds (funds that would have included both RIFs and REITs).

The usual position applies for both a RIF and a REIT in relation to supplies of the underlying properties – that is:

  • letting of commercial properties will be subject to VAT if an option to tax has been made, which generally should enable VAT recovery; and
  • letting of residential property is generally VAT exempt, so there is no VAT recovery in relation to operational costs (although zero rating may be available to reduce the amount of irrecoverable VAT incurred in the context of the development/initial supply of certain types of residential property).

UK tax filing requirements

UK-resident investors will, of course, have UK tax filing obligations in the usual way. However, the nature of their returns may be different. For example, if the RIF receives rental income or interest income, an investor should be treated, from a UK-tax perspective, as receiving its proportionate share of that income as it arises and should be taxed (or exempt) according to its own circumstances. By contrast, a REIT is tax opaque, so investors will be taxed only once the REIT distributes the income and for UK tax purposes, which will generally be treated as either property income (if the underlying income has benefitted from the REIT exemption) or dividend income.

For non-UK resident non-exempt investors, there are material differences:

  • REIT: generally, a non-UK resident investor should not be subject to any UK tax payment (other than the UK withholding tax) or filing obligations, in each case unless they dispose of an interest in the REIT or wish to reclaim some of the withholding tax on REIT dividends (assuming that they are entitled to do so under the relevant tax treaty).
  • RIF: for income taxation purposes, a non-UK resident will be required to register for UK tax as a non-resident landlord and must pay UK tax on its share of income returns as they arise in the RIF.

For CGT purposes, generally a non-UK resident investor should not be subject to CGT on any gains arising from disposals made by a REIT, or by a RIF (provided the RIF rules have been complied with), but the investor would be subject to CGT (unless it has an exemption) if the investor disposed of its interest in the RIF or REIT where the RIF or REIT (as applicable) is “UK property-rich”.

Further considerations

Exit options: It is expected that the RIF should be able to convert to a long-term asset fund co-ownership unauthorised contractual scheme without tax friction. The conversion would require approval from investors and the Financial Conduct Authority (FCA).

Many private, unlisted REITs are expected to exit by way of disposals by the REIT or its subsidiaries. However, in some structures it may be possible to convert to a listed REIT without tax friction, with approval from investors and the relevant listing authority (which would be the FCA in the case of a UK listing).

Underlying assets: A RIF – within the UK exempt investor restricted RIF category – can hold any assets (not constrained to real estate), whereas the UK property-rich RIF must derive at least 75% of its gross asset value from UK real estate. A REIT needs to comply with the REIT conditions including:

  • holding either (i) at least three properties (none of which represents more than 40% of total value of the REIT’s properties), or (ii) a single commercial property worth at least £20m;
  • holding directly or indirectly 75% or more UK real estate used in the REIT’s property rental business; and
  • distributing 90% of property income profits annually. In the case of the RIF, the manager and investors within the RIF deed have the flexibility to adopt the distribution policy that they consider appropriate.

With regard to the last point, there is no distribution obligation that applies to the RIF. This means that the RIF would be appropriate for a fund that (a) is labelled “sustainability improver” under sustainability disclosure regulations and (b) intends to provide capital growth by investing in a UK real estate portfolio that (i) catalyses the transition of that portfolio and (ii) utilises rental income from the portfolio.

Regulatory status: A RIF needs to be an Alternative Investment Fund (AIF). As such, various requirements and protections will apply (such as those regarding AIFMs and depositaries). By contrast, not all REITs need to be AIFs.


Both the RIF and unlisted REIT are welcome additions to the UK’s funds landscape. They will help to achieve the funds regime review’s goal “to make the UK a more attractive location to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs”.

Hopefully, my assessment will assist in choosing the right RIF or REIT horse for the relevant fund manager and investor course.