Background
As part of its response to a review of the UK funds regime, the government is proposing a new unauthorised UK contractual scheme which will be open to certain investors (the RIF). The proposed new scheme is relevant in relation to investment in UK real estate as an ‘onshore’ alternative to ‘offshore’ structures, although there are currently SDLT issues which will need to be resolved if the RIF regime is to be widely taken up.
Following an initial consultation which ran from April to June 2023, draft regulations which will implement the RIF were published on 2 April 2024. The draft regulations were initially subject to consultation until 14 May 2024, and the powers have been granted to issue regulations by Finance Act (No. 2) 2024. However, the general election has meant that the process has been put on hold and, as yet, no timeline for implementation of the RIF regime has been announced. The following comments are based on these draft regulations, which may change before they are laid.
Overview of the UK tax treatment of the RIF
Subject to meeting the eligibility and notification requirements, it is proposed that the UK tax treatment of a RIF should broadly follow that of the existing Co-ownership Authorised Contractual Scheme (CoACS). This is subject to certain changes to ensure that the 2019 non-resident capital gains (NRCG) regime in relation to UK property and certain UK property rich shares is not avoided.
The RIF itself will not be taxable on its income, which is treated as arising directly to its investors. Where investors are exempt from UK tax on the income (e.g. UK registered pensions schemes or sovereign immune investors) no UK tax will therefore be suffered.
Where the RIF invests in UK immovable property, UK withholding tax may apply where the investors are not UK resident, unless they apply for gross payment status under the Non-Resident Landlord Scheme or where clearance has been obtained to make payments gross where Sovereign Immunity applies.
The RIF itself will not be a taxable person for capital gains purposes. For the investors, instead of the RIF being treated as transparent, their interest in the RIF will be treated as a chargeable asset (if they are UK tax resident) or deemed to be shares in a company and potentially subject to NRCG on UK property rich shares (if they are not UK tax resident).
It is proposed that the RIF will be treated as a company for SDLT purposes (except in relation to claims for group relief and certain construction/acquisition reliefs), as with a CoACS. Consequently no SDLT will arise to investors on acquiring their interests, but the RIF will be liable to any SDLT on its acquisition of UK property. The existing SDLT seeding relief which applies to CoACS is extended to the seeding of an unauthorised co-ownership contractual scheme which elects into the new RIF regime.
As with a CoACS, the RIF will be treated as transparent for stamp duty and stamp duty reserve tax, but the reliefs available in relation to CoACS will also apply to RIFs.
There are no special VAT provisions in relation to RIFs.
The ‘restricted’ RIF regime
The ‘restricted’ RIF regime (which only applies on making an election) will only be available in the following three (alternative) circumstances:
The RIF is ‘UK property rich’ at all times (so that non-resident investors can be taxed). Whilst there are some differences, this is not dissimilar to the restriction applicable to ‘offshore’ funds which are subject to a Fund Exemption Election, and there are consequences where this condition is breached.
The RIF only has investors who are exempt from tax on gains other than by reason of non-residence (so there is no loss of tax at the investor level, even if the RIF is not UK property rich). This is similar to the existing treatment of a UK exempt unauthorised unit trust, and will include investors such as UK registered pension schemes, overseas pension schemes (as specifically defined) and investors who are sovereign immune.
The RIF does not invest directly, or indirectly, in UK property or in UK property rich companies (subject to an exemption relating to a less than 10% interest in certain UK property rich collective investment vehicles). Where the RIF does not invest in UK property, there should be no loss of UK tax in relation to non resident investors.
Subject to some mitigation for certain minor or temporary breaches, where these conditions cease to be satisfied, the RIF will be treated as a partnership (i.e. transparent) for the purposes of UK tax on capital gains. There may also be other implications for investors.
The proposed ‘unrestricted RIF’ as originally set out in the consultation will not be introduced following the response to the consultation.
Other eligibility and notification requirements
In addition to the above requirements, the proposed RIF regime is restricted to a scheme which meets certain eligibility criteria, broadly:
- it is a contractual ‘co-ownership scheme’ (as defined in section 235A of FSMA) which is not authorised
- it is ‘UK based’ (ie the operator and depository are bodies corporate incorporated, and with a place of business, in the UK, and the arrangements which constitute the scheme are governed by the law of England and Wales, Scotland, or Northern Ireland)
- it is an Alternative Investment Fund (under the Alternative Investment Fund Managers Regulations 2013)
- it complies with s.261E(2)-(3) of FSMA in relation to its investors
- it meets either a genuine diversity of ownership (“GDO”) condition or ‘non-close test’ (to be modelled on the existing tests as they apply to the capital gains Fund Exemption Election in Schedule 5AAA 1992)
- The government has made provision for a RIF to be structured as an umbrella fund for capital gains purposes (where it is set up as an umbrella fund), such that the umbrella fund is ignored for capital gains purposes and each sub fund is treated as a separate and distinct collective investment scheme.
The RIF will be required to specify the date from which it wishes to be treated as a RIF, and make a declaration that it meets the above criteria. In certain circumstances, the GDO/non-close test and the ‘UK property rich requirement’ may be deemed to be satisfied in order to make the election. As with the other requirements specified above, if it subsequently ceases to meet those criteria it will lose its status as a RIF, subject to some provision for temporary breaches.
Next steps
Following the publication of the draft regulations, representations were made by the industry but as noted above, the announcement of the general election curtailed the process. We await further developments following the general election.
If you would like to discuss this further, please get in touch with your usual PwC Real Estate Tax contact.