Our previous briefing on property authorised investment funds (PAIFs) outlined some of the legal and commercial obstacles preventing a successfully launch of such investment fund vehicles. There is another major commercial issue around capital seeding of new PAIFs. Broadly, the tax rules state that PAIFs must have at least 60% of their assets in eligible property assets which include ownership of Commercial Property, Shares in Real Estate Investment Trusts (REITs) and certain offshore funds with similar attributes.
A number of property fund managers have funds based offshore in Jersey or Guernsey Channel Islands commonly known as JPUTs or GPUTs. Historically theses funds had been set up to enable managers to co-mingle onshore UK approved pension funds and overseas investors without tax sticking at the fund level. Where such funds wanted to attract UK SIPP investors a listing of the fund units on the Channel Islands Stock Exchange (CISX) broadly such funds had been structured as tax look through for income such that any UK tax attributable to net rental income could be recovered by UK tax exempt investors. The onshore equivalent to these funds was Exempt Unauthorised Units Trusts (EPUTs).
A way to tackle this seed capital issue would be to bring JPUTs or GPUTs onshore as first UK authorised unit trusts followed by a conversion to PAIFs. In general there are a number of UK tax breaks to facilitate this process with the exception of an immediate relief for Stamp Duty Land Tax (SDLT) on the first step of the migration process. Potentially SDLT at the rate of 4% on the underlying property portfolio could be triggered on migration of the PUTs onshore. However, there are legal aspects which could be addressed to mitigate this problem. Careful drafting of the PUTs trust deed of variation and changes to appointment of UK Trustees and retirement of offshore trustees could prove helpful to the fact pattern.
In addition to SDLT above there is a cash flow position to manage on UK VAT since for VAT purposes the first and succeeding steps in the on shoring process triggers a change of ownership. Again this matter can be addressed by careful planning. Government authorities are aware of these matters and are usually helpful in accommodating a commercial project plan.