Draft Finance Bill 2016
We now have the draft legislation for both the changes to the stamp duty land tax (SDLT) treatment of tax-transparent contractual funds (ACSs) and for the new seeding relief announced in the Autumn Statement. These will allow new property funds, both tax-transparent funds and property authorised investment funds (PAIFs), to be launched.
These changes, which we and others have lobbied for, could change the property fund landscape with property ACSs and PAIFs competing effectively with Jersey property unit trusts and other offshore structures. They will come into effect when the 2016 Finance Bill is enacted next summer. Meanwhile there is a consultation period lasting until 3 February 2016, and it is important that the industry comments on the details.
SDLT treatment of contractual schemes
The changes, to be enacted in the 2016 Finance Bill, will allow units in the UK’s new authorised contractual co-ownership schemes (ACSs) to be traded without attracting an SDLT charge. This will make it possible to launch new property ACSs. The change will also apply to equivalent offshore contractual funds. It will work by treating the funds as companies for SDLT purposes (in the same way as SDLT works for unit trusts).
Seeding relief for ACSs (and equivalent EEA funds)
Treating ACSs as companies for SDLT purposes will, however, create a problem in that seeding transactions will prima facie trigger SDLT, so there will also be a new seeding relief to allow an empty fund to be “seeded” with a property portfolio. This SDLT-free seeding period will end when a third-party investor first subscribes cash (or non-property assets) to the ACS or a maximum of eighteen months if there aren’t any non-property subscriptions. A really exciting thing about this seeding relief is that there can be any number of seed investors and they do not need to associated in any way. The relief will also apply to equivalent regulated funds in the European Economic Area.
Seeding relief conditions
These reliefs will allow commercial and/or residential property to be acquired by a fund in exchange for units in the fund with full relief from SDLT, subject to achieving minimum portfolio levels by the end of the seeding period.
There will be minimum portfolio sizes (£100 million and 10 units for commercial property, £100 million and 100 units for residential property). These may be too high and could act as a barrier, particularity for residential funds, but HM Revenue & Customs is open to representations.
The draft Finance Bill provides for a potential “clawback” of SDLT relief in certain circumstances. This is to address government concerns about creating a loophole.
The clawback (which would be based on the amount of the SDLT relief originally received) would be charged to the operator of the ACS/the PAIF. This is the part of the draft legislation which requires the most consideration from the industry because, while some of the clawback conditions are remote, others are quite likely to occur in practice and be outside the control of the operator.
We understand that Revenue Scotland are considering the position for land and buildings transaction tax (LBTT) and are in contact with HMRC.
The draft legislation and HMRC explanatory material can be found here.