Property Authorised Investment Funds (PAIFs) were originally introduced in the UK in April 2008, but take up of these vehicles has so far been relatively low, with no PAIFs currently open to retail investors. However, a recent announcement in the Finance Bill could make PAIFs more appealing - and result in more of them being created in the UK. Her Majesty's Revenue and Customs (HMRC) intends to make it more straightforward for existing funds to convert in order to come under the PAIF tax regime, which will provide investors with a tax-efficient way to put money into the property market.
The HMRC proposals involve allowing investors to exchange their units in a specialised PAIF feeder funds for units in the PAIF itself - or the other way around - without being subject to capital gains tax. These changes are particularly important for investors who are entering a PAIF via a tax-exempt product, such as an individual savings account (Isa) or a pension scheme. One of the main appeals of PAIFs is the way in which the income is distributed, making them more tax efficient than other options, investment director at Standard Life Investments Barry MacLennan explained.
"Under the PAIF framework, property funds can distribute income to investors and that income can be split to show that which has been derived from rental income, dividend income or interest income," he noted. Mr MacLennan added this brings them on to "a more level playing field" with Real Estate Investment Trusts (Reits). The problem so far with the PAIF model has been that many providers are unable to deal with three income streams separately, which resulted in the creation of feeder funds to allow direct investors to take advantage of PAIFs. Under current tax rules, this means some investors could be liable for capital gains tax if they converted from the feeder fund directly to the PAIF or vice versa. However, it is hoped the proposed changes by HMRC will go some way towards remedying the difficulties faced by providers of this kind of investment vehicle, allowing more people to access this sort of fund.
Chief executive of the Association of Real Estate Funds (AREF) John Cartwright, believes the move is a positive one for PAIFs. "The important point is that it now enables managers who have funds which are on a number of platforms to convert their authorised funds into OEICs (open-ended investment companies), without necessarily having to wait until every platform was able to deal with the income streaming into the PAIF. So our expectation is that we'll see quite a few conversions [to PAIFs] during the course of 2012," he stated. The Tax Incentivised Savings Association (TISA) agrees that the changes mooted by HMRC are a step in the right direction.
Commenting after the Finance Bill was released, TISA director of policy Malcolm Small expressed his support for the measures and said the alterations to taxation will help deliver a "competitive advantage" for those involved in the market, as well as ensuring consumers are not adversely affected. The Investment Management Association (IMA) echoed these sentiments, urging retail fund platforms to establish PAIFs that are available to retail investors, as well as those with larger sums of money to play with. Director at the IMA Julie Patterson stressed the importance of the changes to those investing in PAIFs via Isas or pension plans, as this will ensure property funds held as part of such an investment strategy do not attract additional taxation. Mr Cartwright revealed AREF estimates the new regulations could result in some £1.6 million being returned to investors who enter a PAIF annually, should such schemes become successful.