The Association of Real Estate Funds (AREF) has reacted to regulatory changes by the UK government to property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs).
The association said the UK Treasury recently paved the way for a new breed of property funds to get off the ground by removing a stamp duty land tax (SDLT) “roadblock”.
AREF said the new relief was 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.
Seeding relief for PAIFs and CoACSs will enable existing property funds to switch to more efficient alternative structures, without a tax hit.
Currently, investment in most property funds offers no tax neutrality, as tax can be levied more than once.
In addition, new rules for CoACSs remove confusion as to how schemes should be treated for SDLT.
AREF said the confusion had been a “major obstacle” and that property investment would now become a “viable option for CoACSs for the very first time”.
The changes were made in the UK’s 2016 Finance Bill.
John Cartwright, AREF chief executive, said PAIF and CoACS regimes offered 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,” he said. “Less tax-efficient vehicles will be able to convert without being hit with a tax bill.
“We are, however, disappointed the government has not listened to industry calls to accommodate unit-linked funds within these new provisions.”
AREF, however, also claimed 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, the association said.
Conversely, the UK government’s reform of SDLT rates on non-residential property will adversely impact institutional investors, AREF said, reducing 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.
A 1% increase in the SDLT rate on commercial properties valued at £1.05m and over will, Cartwright said, “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,” he said.
“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.”
