The long-awaited UK Reserved Investor Fund ("RIF") is now available for UK funds. We expect RIFs to be of real interest to UK real estate fund managers. Game changer?
The RIF means UK real estate fund managers no longer have to use offshore JPUTs / GPUTs where non-UK investors are part of the investor group. This can reduce costs and operational complexity along with a simplified UK fund structure.
RIF - Key Advantages
For UK real estate fund managers, the RIF's main advantages are:
- tax-efficient onshore version of the offshore JPUT / GPUT;
- lower cost and operational complexities than JPUTs / GPUTs; and
- they can accommodate both UK and non-UK investors within a single vehicle. This can further reduce cost and operational complexity by doing away with a master / feeder real estate fund structure.
While the RIF can invest in a wide range of assets, it is expected primarily to be used for investment in UK commercial real estate.
What is a RIF?
RIF's main features:
- similar tax treatment and advantages to JPUTs and GPUTs (see below);unregulated alternative investment fund.
- open to both institutional investors and professional investors (e.g., HNWIs, family offices etc.);
- can be close-ended or open-ended;
- legal form: co-ownership contractual scheme managed by a UK regulated operator / fund manager and with a UK depositary;
- FCA registration of the RIF is not required; and
- can be an umbrella fund with sub-RIFs.
Ownership & eligibility tests
To access the RIF regime's tax benefits, a RIF must satisfy certain conditions such as:
- Genuine diversity of ownership or a non-close test.
- Falling within one of three RIF types: 1. minimum 75% UK property assets (including certain UK property rich companies); 2. all investors are tax-exempt (e.g., pension funds, state entities etc.); or 3. no direct investments in UK property or UK property rich companies.
How is a RIF and its investors taxed?
Key RIF tax benefits
- A RIF is treated as tax transparent for UK income tax purposes.
- A RIF is not subject to tax on gains and gains only arise for investors when RIF units are disposed of.
- RIF units are permitted property under UK personal portfolio bond tax rules (allowing individual policyholders to select RIFs within their life insurance policy without suffering negative tax consequences).
A RIF with wholly (or nearly wholly) owned property holding subsidiaries may be able to make an election so that the RIF subsidiary is exempt from tax on capital gains from the direct or indirect disposal of UK land.
This transparency for income tax means that any claims for capital allowances would need to be made at the investor level. However, a RIF may make an election to allow capital allowances to be calculated at RIF level and then allocated to investors, similar to how a partnership operates for capital allowances.
Stamp Duty Land Tax ("SDLT")
- No SDLT should be payable on the sale or purchase of RIF units.
- "Seeding" relief on in-kind contributions to a RIF in return for such RIF's units, in certain cases.
Stamp Duty & Stamp Duty Reserve Tax
The following transactions will be exempt from UK stamp duty and stamp duty reverse tax:
- Purchases of RIF units by investors; and
- Transfers of securities to a RIF in return for RIF's units.
VAT – Management Fee
Technically, the management fee charged by RIF operators to the RIF for their services is unlikely to benefit from the VAT exemption applicable to some management fees.
However, this should not be a significant issue if the RIF holds UK commercial property, exercises options to tax in respect of the property and charges VAT on rents.
Furthermore, it may be possible to structure payments to the manager to minimise irrecoverable VAT, or VAT group the manager and fund.
How does a RIF compare as a way to hold UK commercial property investments?
There are many investment vehicles that can be used for UK commercial property, among the more popular are:
- Real estate investment trusts ("REITs");
- Property authorised investment fund ("PAIFs");
- Onshore or offshore corporate vehicles (potentially in jurisdictions such as Luxembourg which have regimes permitting compartmentalisation of such vehicles);
- Offshore unit trusts (such as JPUTs and GPUTs);
- Co-ownership authorised contractual schemes; and
- Partnerships (including LLPs and LP), in England, Scotland or offshore.
RIFs occupy a clear niche as an addition to these options. As RIFs can be close and do not require FCA registration, they are likely to be both more flexible and more straightforward than a PAIF. Equally, while the compliance burden on REITs has decreased in recent years (see our previous article), the compliance burden on a RIF will still be significantly less than a REIT.
RIFs also provide tax benefits not enjoyed by partnerships or standard corporate vehicles, at the price of some additional restrictions and reporting requirements.
Finally, RIFs provide many of the benefits of JPUTs and GPUTs, without needing to be managed offshore and dealing with a non-UK jurisdiction.
We therefore predict RIFs will become a popular choice for UK commercial property funds targeting a narrow investor pool.
If you would like to discuss the RIF regime further, please contact our experts.
