The new Reserved Investor Fund – unreserved good news?

Update: HMRC has now published for consultation the detailed regulations containing the tax rules for the Reserved Investor Fund, the draft Co-ownership Contractual Schemes (Tax) Regulations 2024. They are open for responses until 14 May 2024. 

In April last year, HM Treasury and HMRC published a joint consultation on the possible introduction of a new Reserved Investor Fund (RIF) regime – our summary of the consultation paper can be found here.

In the Spring Budget announced on 6 March 2024, it was confirmed that the Government has decided to proceed with the introduction of a restricted RIF and further details on the tax rules that will apply to such funds were released. See our summary of the Spring Budget here.

Although the concept of the Unauthorised Co-ownership AIF had already been introduced by Section 64 of FSMA 2023, legislation will be introduced in Spring Finance Bill 2024 to define what a RIF is and give HM Treasury power to make regulations in respect of the tax regime applicable to the RIF.

The start date for the new regime will be set out in a statutory instrument, “to be laid at a later date”.

What is a RIF?

Since Brexit, the UK Government has been undertaking a review of the UK funds regime to enhance the UK's attractiveness as a location for asset management and fund domicile.

Through the review, a gap in the UK's existing funds range was identified for a new unauthorised contractual scheme:

• open to all asset classes
• available to professional and institutional investors (such as certified high net worth investors and both certified and self-certified sophisticated investors) but not to the broader retail investment market and
• with lower costs and more flexibility than the existing authorised contractual scheme.

As a result, the Government’s consultation proposed that a RIF should be limited to co-ownership contractual schemes which meet certain eligibility criteria, including, as a minimum, requirements that a RIF:

• is 'UK-based' – this means that
  • the operator and depositary must
    • be bodies corporate incorporated in the UK and administer their affairs in the United Kingdom, and
    • each have a place of business in the UK and
  • the deed setting out the arrangements which constitute the scheme must be governed by the law of England and Wales, Scotland or Northern Ireland
• is an Alternative Investment Fund
• complies in substance with certain regulatory requirements imposed on authorised contractual schemes regarding the persons to whom units may be issued
• meets either a general diversity of ownership condition or non-close test, in each case modelled on the version of the rules that apply for non-resident capital gains purposes; and
• has notified HMRC that it wishes to become a RIF and makes a declaration that it meets the above criteria.

Eligibility for regime

There will be three different types of restricted RIFs, namely where:

• at least 75% of the value of the RIF’s assets is derived from UK property,
• all investors in the RIF are exempt from tax on gains, and
• the RIF does not directly invest in UK property or in UK property rich companies.

A RIF would, in addition, have to meet other prescribed eligibility criteria that will be set out in secondary legislation.

The RIF is expected to be particularly attractive for investment in commercial real estate. However, the RIF will be able to invest in a wide range of asset classes beyond real estate, subject to being within one of the three restricted regimes set out above.

The Government has, though, decided against proceeding with an unrestricted RIF at this stage, as feedback to its consultation saw such a fund as being operationally complex and likely to be unattractive to most investors.

The tax treatment of RIFs

The Government has now confirmed the following key tax features of the RIF regime:

(a) General objectives

• A RIF should achieve tax neutrality, such that an investor in a RIF should be in a broadly similar position as if they had invested in the underlying assets directly.
• Investors should have certainty as to their tax treatment.
• The RIF regime should be compatible with the UK’s existing tax regimes, preserve the UK’s ability to exercise its taxing rights and support the UK’s robust approach on tax avoidance and tax evasion, and its international commitments.

(b) Income and reporting

• A RIF will be treated as transparent for income purposes.
• The RIF will therefore need to report annually to its investors and HMRC, providing investors with sufficient information to enable investors to comply with their tax filing obligations.
• A RIF will be treated in the same way as a co-ownership authorised contractual scheme (CoACS) where it invests in an offshore fund.
• Units in a RIF will be permitted property for the purposes of the UK personal portfolio bond rules.

(c) Capital gains

• A RIF will be treated as opaque for capital gains purposes from the point of view of the investor (who should, therefore, only be subject to tax on capital gains when it disposes of its units in the RIF).
• Units in a RIF will be treated as an investor’s capital gains asset - any interest of the investor in the underlying property of the RIF will be disregarded for capital gains purposes.
• A RIF will be treated in the same way as a co-ownership authorised contractual scheme (CoACS) for the purposes of the regime for the taxation of disposals of UK real estate by non-residents. This means that a RIF will therefore be able to make an exemption election for these purposes.

(d) Stamp duty land tax (SDLT)

• A RIF will be treated as a company for SDLT purposes.
• As a result, no SDLT should be payable on transfers of units in a RIF.
• An unauthorised co-ownership contractual scheme which is not a RIF will remain transparent for SDLT purposes.
• An election by an unauthorised co-ownership contractual scheme to become a RIF will be treated as a land transaction for SDLT purposes, with SDLT charged on the market value of any English and Northern Irish property held by the scheme at the date of entry into the RIF regime.
• There will be a seeding relief for RIFs similar to the seeding relief for CoACSs.
• Although generally treated as a company, the RIF will not be treated as such for the purposes of SDLT group relief and reconstruction/acquisition reliefs.

(e) Stamp duty and stamp duty reserve tax

• A RIF will be entitled to the same stamp duty and stamp duty reserve tax (SDRT) exemptions as a CoACS.
• These exemptions will apply to:
  • transfers of securities/agreements to transfer securities to a RIF in consideration solely for the issue of units in the RIF,
  • transfers of securities/agreements to transfer securities between sub-schemes of an umbrella RIF, and
  • transfers of units/agreements to transfer units in a RIF.

(f) Capital allowances

• As for a CoACS, the operator of a RIF will be able to make an election enabling it to calculate and apportion any capital allowances in respect of a RIF’s qualifying expenditure to investors in the RIF.