On 18 July 2014, the government launched a consultation on stamp duty land tax (SDLT) rules for property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs).
As trailed in the Budget, the consultation is essentially about the case for taking action as well as the detailed design features of the possible PAIF seeding regime and CoACSs SDLT regime.
The changes are important for the property fund sector and asset management industry generally. Because the consultation is about whether to introduce the changes, it is particularly important that as many people as possible respond. The deadline for responses is 12 September 2014 to enable the government to publish the response this autumn.
What is the case for taking action on SDLT rules for property investment funds?
Regarding the case for taking action, the government is seeking information about:
- the size and structure of the property fund industry
- the extent to which SDLT is limiting its growth
- the potential benefits to the sector and wider economy of permitting the SDLT-free seeding of PAIFs and producing an effective SDLT regime for CoACSs.
The potential design of an SDLT seeding relief for PAIFs
The government's current thinking is that the relief should apply to transfers of portfolios which become the original scheme property of a PAIF.
The government is considering whether the relief should be restricted to situations where a minimum number and value of properties is transferred, for example £100 million worth and/or 10 discrete commercial properties.
For residential property, the minimum value would be the same but the minimum number of units may be greater, for example 100. They are also considering a targeted anti-avoidance rule to catch any individuals connected with a fund who occupy scheme property.
Generally, the government is considering three further protections:
- the ability to deny seeding relief if there is a tax avoidance motive
- to repeal or alter the relief if it should be abused
- a claw-back mechanism.
This last is obviously commercially sensitive. As proposed, it would apply only if the entity seeding the PAIF should redeem or transfer its original shares within three years and to the extent that it does so (though this would have to extend to feeder fund units to be effective) or the PAIF loses status. Crucially, it would not bite if the seeding entity’s holding is diluted by the issue of other PAIF shares.
Our initial view is that this proposal is reasonable and workable. It would obviously be preferable not to have the claw-back mechanism and to rely solely on PAIFs’ genuine diversity of ownership requirement to protect the Exchequer but after the government’s introduction of a (totally unprotected) unit trust SDLT seeding relief in 2004 and the property sector’s widespread use of it, it is understandable that the present government should be particularly wary of opening up what it would regard as a loophole.
An effective SDLT treatment of co-ownership authorised contractual schemes
The proposals are to exempt transactions in units from charge with the exemption covering the issue, transfer and redemption of units and to move the SDLT charge on property acquisitions to the scheme (currently it lies with the unitholders).
These proposals seem eminently sensible and would make non-group property CoACSs viable. To protect the Exchequer, the government is considering introducing a general SDLT charge on the transfer of property into CoACSs and their acquiring property from a unitholder (or connected party), but carving out a seeding relief which would operate much like the proposal for the PAIF seeding relief.