We are pleased that the government has today confirmed that it will introduce a new SDLT regime for ACSs and a new seeding relief for PAIFs and ACSs.
Under current law, ACSs are transparent for SDLT purposes, so SDLT generally arises where unitholders increase their interest in a fund. As a result property ACSs are suitable at the moment only for groups of corporate investors.
The new regime will, from the enactment of the 2016 Finance Act, take transfers of units in ACSs (and, we assume, in equivalent offshore funds) out of the charge to SDLT. Instead, SDLT will be payable when UK property is acquired by the ACS. This will give the same SDLT result as in SDLT-opaque funds and will allow widely held property ACSs to be launched from next summer.
To counter the resulting disadvantage of SDLT arising when a new ACS is seeded, a specific seeding relief will be introduced at the same time.
PAIFs are open-ended investment companies and so are liable to SDLT on the acquisition of UK property, including on seed properties. There is, however, no stamp tax liability on transactions in UK shares.
The government has also announced that it will introduce a new seeding relief for PAIFs which is very similar to the proposal for ACSs.
Seeding Relief for ACSs and PAIFs
The seeding relief will allow the transfer of an initial portfolio/portfolios of UK property into an ACS or PAIF in exchange for the issue of units/shares.
The main features will be:
- The seeding period will begin on the initial transfer of property into the portfolio and end either with the first third-party investment or after 18 months. This will allow property to be seeded in multiple tranches, in recognition of the difficulties associated with seeding a large property portfolio in one go.
Comment: We are pleased that the government has accepted that seeding may take place in a number of tranches.
- A portfolio test will be introduced, set at a minimum value of £100m and 10 non-residential properties, or £100m and 100 residential properties. In the case of funds with a mix of residential and non-residential property, a percentage test will apply. As a result, if the total value of residential property seeded is less than or equal to 10% then the non-residential requirements must be met. If the total value of residential property seeded is greater than 10% it will be the residential requirements that must be met. Consequently, where a predominantly non-residential fund has a ‘residual’ amount of residential property, it will still be the non-residential requirements that need to be met.
Comment: While it was inevitable that the government would require a portfolio test of some kind, we are not convinced that these figures are appropriate, particularly for residential property. There will be scope to engage with HM Treasury/HM Revenue & Customs on this aspect (see below).
- A clawback mechanism will apply to recover the SDLT relieved where either:
- the fund ceases to qualify as a PAIF or ACS, or
- the portfolio test is not met at any time within three years of the end of the seeding period, or
- some or all of the units received in consideration for the initial seeding are disposed of within three years of the end of the seeding period. A ‘first in last out’ principle will apply here in order to identify the seeded units, or
- a seeded residential property is occupied by a person connected with the fund.
Where relief is recovered from a PAIF, the fund itself will be wholly liable for the SDLT due on clawback and will be required to make a return of the tax due. Where SDLT is recovered from an ACS, the scheme operator will be liable.
Comment: Again, it was inevitable that a claw-back would be included in order to prevent abuse. The third bullet point on the three year test is problematical and will require careful analysis and debate by the industry. The first in, last out principle will, however, be potentially useful, and will apply where the seeding entity is making further cash investments in the fund.
SDLT surcharge on additional properties
The government has also announced that there will be a 3% surcharge on the SDLT arising on the purchase of second and subsequent residential properties. They intend to consult on the policy detail, including on an intended exemption for corporates and funds owning more than 15 residential properties.
Comment: Apart from the stated desire of the government to stop those buying buy-to-let properties and second homes from squeezing others out of the local property market, we understand that the government wants to discourage the poor practice it has seen in some parts of the residential letting market, and so it is encouraging professional management, including through the medium of funds. We think that its desire to increase the availability of good quality, affordable properties may help with discussions about the minimum size of seed residential property portfolios, which, as proposed, is very much greater than 15 and has a £100m requirement too (which would require, for example, 1,000 homes if their average value were £100,000).
Publication of draft legislation and consultation
The draft legislation is being published on 9 December 2015 and the government will be seeking comments on it up to 3 February 2016.