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Spring Budget 2024: Reserved Investor Funds confirmed

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The government has announced that it will be including the enabling provisions necessary for the introduction of regulations providing for Reserved Investor Fund (Contractual Schemes) or RIFs for short in the Spring 2024 Finance Bill. This is welcome news.

While the concept of an unauthorised version of the Co-ownership Authorised Contractual Scheme (CoACS) is straightforward, and is a clear gap in the UK’s range of fund types, the gestation process has been slow.

RIFs, which may be standalone or umbrella funds, will need to be funds qualifying as Alternative Investment Funds under the Alternative Investment Fund Managers Directive (as onshored to the UK), so they will not be available to use to replace SPV-type Jersey property unit trusts, at least for the time being. Interestingly, the government considers there is nothing stopping unauthorised contractual schemes at the moment outside the RIF framework but such a scheme does not benefit from the provisions in the Financial Services and Markets Act 2000 and would be entirely tax-transparent.

The base position for the tax regime for RIFs has always been that it should mirror that of CoACS’s as much as possible, with the fundamental principle also being tax neutrality. Essentially, CoACSs are tax-transparent for the purposes of UK tax on income, with the benefit of an elective simplified capital allowances regime. They are also tax-transparent for the purposes of gains so that the entity is outside any charges to tax on capital gains, but the units are deemed to be chargeable assets in the hands of unitholders, with the result that portfolio gains roll-up tax-free but investors are liable to tax on gains realised when they dispose, or are deemed to dispose, of their units. For SDLT purposes, CoACS are deemed to be companies for most purposes, but new CoACSs receiving English property contributed by an incoming investor or investors in exchange for units benefit from a seeding relief. The stamp tax on shares position is slightly complicated but effective. CoACSs are Special Investment Funds for VAT purposes, benefiting from VAT-exemption on their management fees.

Initially, it looked as if RIFs would be able to mirror the CoACS tax regime in all regards except VAT where, inevitably given HMRC’s current thinking, being an unauthorised scheme they would not be SIFs. 

Unfortunately, introducing a capital gains tax regime for the RIF mirroring the CoACS regime would have potentially cut across the newish non-resident capital gains tax regime where the RIF invests in UK property, which led to the idea of the CoACS CGT treatment applying to ‘restricted RIFs’ in three circumstances:

  • where at least 75% of the value of the RIF’s assets is derived from UK property (so the RIF is ‘UK property rich’ for the purposes of the NRCGT rules)); 
  • where all investors in the fund are exempt from tax on capital gains; or
  • where the fund does not directly invest in UK property, or in UK property rich companies.

Anti-avoidance provisions (which are intended to be proportionate) will cover where a RIF breaches these categories, and there will also be mitigations.

Restricted RIFs will still be able to invest in a wide range of asset classes beyond real estate, subject to coming within one of the three restricted categories. 

Three further requirements are that the scheme is ‘UK-based’ (as defined), meet a genuine diversity of ownership (GDO) condition or a non-close test, modelled on the tests in TGCA 1992 Sch 5AAA and that HMRC has been notified.

The government has decided not to introduce an unrestricted RIF as it would be too complex to be viable.