Is the UK Funds Regime fit for UK Real Estate?

  • Written By: Zoe Thomas, Mark Eade
  • Published: Tue, 11 May 2021 15:30 GMT

In recent years, the rules relating to non-residents owning UK property have become even more restrictive. HMRC has made it clear that it would prefer that UK property was not owned offshore, outside its sight and control. The new rules have, however, also had the effect of deterring many investors.

Real Estate Funds Article

Property fund structures are currently being reviewed by HMRC as part of a wide-reaching consultation on the UK fund regime. This is designed to show that the UK is ‘open for business’, drawing investors back to domestic funds rather than going through offshore centres such as Jersey and Guernsey. Feedback was due by the 20 April and HMRC has committed to reporting its findings later in the year.

The review reflects increased recognition that the UK’s current regime for property funds is inadequate and doesn’t always meet the needs of the broad range of investors in UK property. By way of example, the UK tax regime allows for the following tax efficient vehicles: Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs).

Both structures have limitations: some investors don’t like the transparency forced on them by the REIT rules, for example, or the prescriptive conditions on distributions and required stock exchange listing. Others find the need to retain liquidity in the funds a significant constraint and restricts the funds ability to access full real estate returns. There have been well-publicised problems for open-ended funds forced to close to redemptions.

There are also tax concerns: if a REIT holds overseas property in a UK company it is likely to suffer tax in the overseas jurisdiction as well as UK tax on distributions. For some investors, this makes the structure unworkable. The UK authorities are keen to establish a regime that works for a broad range of investors, and encourages investment in UK property, while also bringing in tax revenues.

HMRC consultation

The HMRC consultation has a number of strands: first, it is looking at whether the existing structures can be improved. As such it is asking for feedback on potential changes to the REIT regime, including ways to resolve the double taxation problems and the other barriers that exist.

There are also attempts to resolve the problem of the liquidity mismatch for open-ended property funds. There are proposals for new notice periods for redemptions, designed to address the difficulty of investing in illiquid assets.

There are also two new structures under consideration as part of the review: Long-term Asset Funds and new unauthorised fund vehicles.

  1. Long-term Asset Fund (LTAF) – this would be a new authorised open-ended fund structure designed to enable investors, particularly defined contribution pension schemes, to invest more confidently in illiquid assets. These funds would support dealing at different intervals as well as introducing notice periods for redemptions. The FCA plans to consult in 2021 on setting up a framework for the LTAF, including the potential tax implications.
  2. New unauthorised fund vehicles – unauthorised funds offer greater investment freedom than authorised funds but are more limited in the types of investors that can use them. They are not generally available to retail investors, for example. Some have proposed a new flexible, tax-efficient unauthorised fund structure which would be used for products aimed only at professional investors.

While these would be designed to cover a range of assets, the Association of Real Estate Funds has suggested that they could be structured as a contractual scheme for real estate. This could be offered as an onshore alternative to fund managers looking to service investments in underlying UK real estate assets for pension funds and other professional investors.

These structures are at an early stage and further work is needed to determine whether they would address the problems of the current fund regime for UK property, for example by making the market more competitive and encouraging buyers to the UK market. There is also considerable work needed on the potential tax rules for each structure. HMRC must tread a fine line between ensuring that the rules bring in tax revenues but are not so onerous that they deter external investors.

HMRC’s call for input regarding the UK fund regime was welcomed by the sector and is a positive step towards making the UK a more competitive jurisdiction. It is critical that, whatever changes are introduced, overseas investors are encouraged to invest in the UK and view the UK as ‘open for business’ to help the economy recover post COVID and Brexit. Furthermore, if the UK becomes a more competitive place to locate funds then, in addition to encouraging overseas investment and creating of onshore fund structures, there are likely to be benefits for the wider fund sector and UK-based businesses that support the operation of funds.


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Ref: NTAJ14042150 / 61421lw

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.


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