An important gap in the UK’s fund offering will be plugged by the government proceeding with a legislative framework proposed in its 27 April 2023 consultation on the reserved investor fund (RIF) – a proposed closed-ended vehicle for non-retail investors. A whole spectrum of managers, from SMEs to larger firms, will be able to take advantage of the RIF as will, importantly, their investors – hopefully from the next tax year (April 2024).
As key architect and lead campaign advocate of the RIF, I strongly encourage industry participants to provide positive responses to the consultation – especially managers confirming to the government their interest in proceeding with RIF launches. The final consultation response date is 9 June 2023.
Once the RIF has been introduced, managers will avoid having to go offshore with all the challenges and costs of dealing with multiple legal, tax and regulatory regimes. In addition, compared with onshore ‘authorised’ fund structures (which have to open-ended), the RIF can be closed-ended or hybrid and offer more flexibility, including more restricted redemption windows tailored to liquidity matching. The RIF will also be subject to lighter regulatory compliance (which in turn will reduce launch and operational costs) – and, in due course, could enjoy the less-prescriptive professional fund status envisaged by the FCA as it is considers updating the UK asset management regime.
Ahead of April 2024, it is anticipated that the RIF – as an unauthorised co-ownership UK alternative investment fund (AIF) – will be introduced into primary legislation with Royal Assent to the Financial Services and Markets Bill, and associated secondary legislation being formalised. The legislative framework to create the RIF is already in motion, which provides for the market the opportunity for speedy adoption when the legislation has been implemented.
The RIF is modelled on the existing co-ownership authorised contractual schemes (CoACS) legislation, but is not open-ended. For regulatory purposes, it must also be classified as an AIF and will benefit from the flexibilities of being an unregulated collective investment scheme.
I anticipate, in practice, the RIF will be formalised principally with:
- a deed, made between a RIF’s operator/manager – a UK alternative investment fund manager (AIFM), with small authorised/registered AIFMs permitted – and depositary (with its own engagement agreement);
- other documentation admitting at least two investors, given its co-ownership structure.
As envisaged, the RIF will be an attractive speed-to-market launch solution. There will be no need for prior application to, or approval from, the FCA nor registration at Companies House.
The AIFM will make decisions on behalf of the RIF (and, effectively, its investors) about the acquisition, management and disposal of assets, as well as risk management, in accordance with the provisions of the RIF deed which will not be subject to the same restrictions as an equivalent authorised fund.
Eligible investors include professional investors, large investors (who commit at least £1m) and existing RIF investors. Certain types of retail investor fall within the large investor category: certified high-net worth and sophisticated investors and self-certified sophisticated investors. For the purposes of these retail investors, the RIF would automatically fall under the FCA’s marketing rules for non-mass market investments (NMMI). RIF units would be treated as NMMIs, and as such suitability assessment with the retail investors would need to be undertaken.
Tax – with ‘green lanes’
From a tax perspective, the RIF would also be modelled on the existing CoACS legislation such that it is transparent for income and transfers of RIF units are exempt from stamp taxes, including stamp duty land tax (SDLT). It is currently envisaged that the RIF may also benefit from a seeding relief from SDLT, modelled on the existing CoACS relief.
It is anticipated that the main departure from CoACS treatment will be in respect of taxation of chargeable gains. In its consultation document, the government contemplates adopting a ‘restricted’ RIF solution involving what I like to term three optional ‘green lanes’ for a RIF. So long as the RIF stays within these green lanes, it will be opaque for UK chargeable gains purposes, meaning that investors in the RIF will not be subject to tax on chargeable gains in respect of disposals by the RIF of underlying assets. The green lanes are intended to provide a straightforward method of protecting the Exchequer, in particular against potential tax avoidance by non-UK resident investors.
The green lanes will comprise:
- UK property rich RIF, where at least 75% of the value of the RIF’s assets is derived from UK (this concept is borrowed from the UK’s non-resident capital gains tax rules);
- RIF with UK tax-exempt investors only; and/or
- RIF with no investment in UK property.
It is understandable that the government is proposing the green lanes proposals, and the proposals reflect a constructive and continuing engagement between government and industry - an engagement which has been a welcome dynamic in progressing the RIF campaign. 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 consultation also helpfully requests views on an ‘unrestricted’ RIF (which would be outside of the green-lanes proposals and so unconstrained in terms of investment strategy or investors) which could potentially be adopted in due course. However, it is likely that the unrestricted RIF would involve some complexity – in particular, as to how the unrestricted RIF would dovetail with the non-resident capital gains tax regime.
In my view, the restricted RIF proposal (that is, those in the green lanes) is a pragmatic way forward for RIF legislation to take effect from April 2024, particularly as the UK property rich ‘green lane’ can be utilised by UK real estate fund managers. There is widespread support from these managers for the RIF campaign. Thereafter building on the restricted RIF legislation and further government/industry engagement, the practicalities of a more pragmatic unrestricted RIF solution can be explored.
Let’s look forward to UK managers utilising opportunities presented by the RIF, unleashing their entrepreneurial potential and attracting institutional and other capital. The RIF can support the government’s work to promote investment in alternatives – longer-term, less liquid assets. The RIF will also be an example of what the FCA has described in its proposals for Sustainability Disclosure Requirements as “innovation in vehicles that can support investment in sustainability solutions”.
Assuming continuing momentum with the RIF initiative following the consultation, managers will then be able to activate plans to utilise the RIF. Hopefully, the RIF will be a conduit to attract capital and help stimulate growth in the UK economy: creating jobs and opportunities, levelling up the nation – for example, via affordable housing and town centre regeneration projects – as well as accelerating our nation’s infrastructure and green industrial revolutions.