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Authorised Property Funds – SDLT - Releasing the potential

  • United Kingdom
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Draft Finance Bill 2016

We now have the draft legislation for both the changes to the stamp duty land tax (SDLT) treatment of tax-transparent authorised contractual funds (ACSs) and for the new seeding relief announced in the Autumn Statement. These will allow new property funds, both tax-transparent funds and property authorised investment funds (PAIFs), to be launched.

These changes, which we and others have lobbied for, could change the property fund landscape with property ACSs and PAIFs competing effectively with Jersey property unit trusts (JPUTs) and other offshore open-ended and quasi-open-ended structures. They will come into effect when the 2016 Finance Bill is enacted next summer. Meanwhile there is a consultation period lasting until 3 February 2016, and it is important that the industry comments on the details. 

SDLT treatment of contractual schemes  

The changes, to be enacted in the 2016 Finance Bill, will allow units in the UK’s new ACSs to be traded without attracting an SDLT charge. It will work by treating the funds as companies for SDLT purposes (in the same way as SDLT works for unit trusts). This will make it possible to launch new property ACSs. We anticipate that this will make them very popular as a UK vehicle, and they will be broadly familiar to investors, functioning for tax purposes in a very similar way to an onshore JPUT. The change will also apply to equivalent offshore contractual funds.

Seeding relief for ACSs and PAIFs (and equivalent EEA funds)

Treating ACSs as companies for SDLT purposes will, however, result in seeding transactions prima facie triggering a charge to SDLT. There will also, therefore, be a new seeding relief to allow an empty fund to be “seeded” with a property portfolio. The seeding relief will apply to PAIFs as well, and the conditions are basically the same for both ACSs and PAIFs. The SDLT-free seeding period will last until the earlier of a third-party investor first subscribing cash (or non-property assets) to the ACS/PAIF and eighteen months. A really exciting thing about this seeding relief is that there can be any number of seed investors and they do not need to associated in any way. The relief will also apply to equivalent regulated funds in the European Economic Area.

Seeding relief conditions

These reliefs will allow commercial and/or residential property to be acquired by a fund in exchange for units in the fund with full relief from SDLT, subject to achieving minimum portfolio levels by the end of the seeding period.

The minimum portfolio sizes will be £100 million and 10 units for commercial property and £100 million and 100 units for residential property. If the residential portfolio is more than 10% of the whole the residential rules will apply. These criteria may be too high and could act as a barrier, particularity for residential funds, but HM Revenue & Customs are open to representations.

The draft Finance Bill provides for a potential “clawback” of SDLT relief in certain circumstances. This is to address governmental concerns about creating a tax loophole. The clawback (which would be based on the amount of the SDLT relief originally received) would be charged to the operator of the ACS, or the PAIF. This is the part of the draft legislation which requires the most consideration from the industry, because, while some of the clawback conditions are remote, others are quite likely to occur in practice and be outside the control of the operator.

No formal advance clearance procedure is included, but we understand that HMRC will consider clearance applications.

Revenue Scotland are also considering the position for their land and buildings transaction tax (LBTT) and are in contact with HMRC.

The draft legislation and HMRC explanatory material can be found here.