Budget Notes


Who is likely to be affected?

1. Authorised investment funds (AIFs) that invest mainly in property, UK-Real Estate Investment Trusts (UK-REITs) or similar foreign companies.

2. Investors in AIFs that enter the Property AIF tax regime.

General description of the measure

3. New regulations for AIFs will be introduced, providing a tax regime for investment into real property and certain property companies, which will enable certain AIFs to elect for a tax treatment that will move the point of taxation from the fund to its investors.

4. The new regulations will enable a Property AIF to provide an open-ended fund alternative to the existing closed-ended UK-REITs.

Operative date

5. The regulations will have effect on and after 6 April 2008.

Current law and proposed revisions

6. Under the current regulations:

•    an AIF pays corporation tax (CT) on rental profit or other property income such as property income distributions from UK-REITs or their foreign equivalents;

•    any other taxable income received by an AIF investing in property is treated in a similar way to property income;

•    the income is distributed by the AIF, along with any other income the AIF may accrue, as a dividend carrying a tax credit;

•    exempt recipients (such as pension funds and charities) cannot reclaim the tax credit; and

•    dividends received from UK companies are not taxable in the AIF.

7. Under the new regulations, laid before Parliament on 12 March 2008:

•    an AIF that invests mainly in property and certain related securities will be able to elect for the Property AIF regime to have effect;

•    in a Property AIF rental profit and certain other property related income will be exempt from taxation in the fund. It will normally be distributed to investors under deduction of tax. Basic rate taxpayers will have no further tax liability, non-taxpayers and exempt bodies will be able to reclaim this tax, while higher rate taxpayers and some corporates will have a further tax liability to pay;

•    other taxable income of the Property AIF will also be distributed to investors under deduction of tax. Investors will similarly be able to either reclaim the tax or incur a further charge as appropriate; and

•    UK dividends which are currently not taxable in the fund will remain exempt, as they are for all corporate recipients and will fund dividend payments carrying a tax credit to investors as at present.

8. To qualify for the new regime Property AIFs will have to meet certain conditions, including:

•    incorporation as an open-ended investment company (subject to Financial Services Authority regulation);

•    carry on a property investment business (amounting to at least 60 per cent of the business);

•    a 'genuine diversity of ownership' condition, so that the fund is not limited to or targeted at only a few specified investors; and

•    limits on the holdings of corporate investors and on the type and amount of loan financing in the fund.

9. The regulations and explanatory memorandum have been published today on the HM Revenue & Customs website.

Further advice

10. If you have any questions about this change, please contact John Buckeridge on 020 7147 2560 (e-mail: john.buckeridge@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk