Land and buildings transaction tax - property investment funds: consultation

Chapter 2: Property Investment in Scotland and the UK

13. The focus of this consultation is on the LBTT treatment of properties held in PAIFs, a type OEIC, and CoACS. Alongside Authorised Unit Trusts ( AUT), these are types of popular collective investment schemes authorised by the UK Government. These schemes are used predominately by institutional investors such as endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies. The majority of investors in these funds represent “patient” capital looking for a steady long term return from rental income and capital appreciation. These schemes also benefit entities with special tax status such as charities, ISA’s and pension schemes.

14. The SDLT/ LBTT treatment is not dependent on where a fund is based or domiciled – property situated in Scotland is subject to LBTT, whilst property situated in England and Northern Ireland is subject to SDLT and property in Wales (as of 1 April 2018) to Land Transaction Tax, regardless of where the fund itself is managed.

15. The investment management sector is of significant importance to Scotland’s economy. HM Treasury figures suggest that some £60 billion worth of UK property was held in investment funds as at July 2014 with a number of UK based funds managing overseas property assets to a much higher net worth, with others having a mix of domestic and foreign assets. We understand that the vast majority of property assets owned by these funds in the UK are non-residential and that funds generally hold properties across the UK, including in Scotland.

16. Scotland has a long established history in the asset management sector with Edinburgh and Glasgow playing a key role in the industry. Firms based here manage over £800 billion in assets, which includes Scottish, UK and international property assets amongst numerous others. It is estimated that 55% ( ^[2] ) of the commercial property sector is owned by institutional investors with £2.8 billion in commercial property transactions in 2017 and new construction heavily reliant on the investment fund sector.

Collective Investment Schemes

17. Collective investment schemes allow investors to pool assets and to share proportionately in the income and gains arising from them. OEIC (as a company) and Unit Trusts (in the person of its trustees) are legal persons and are taxable entities. CoACS however are a contractual arrangement between persons, which is transparent for the purposes of tax and the participants remain responsible for any tax due on their share of the income (and gains) in the fund.

Open Ended Investment Companies – Property Investment Authorised Funds

18. A Property Authorised Investment Fund ( PAIF) is a type of OIEC dealing in property assets, and is an investment structure introduced by the UK Government in 2008 to provide a tax efficient vehicle for collective investment in rental property.

19. PAIFs were designed to ensure that investors are taxed on rental income from the PAIF in the same way as if they had invested directly in the property themselves. This benefits tax-exempt investors, such as charities, pension funds, life companies and ISA investors, who would receive property rental income from the older Authorised Unit Trusts ( AUTs) net of income tax, which they were not able to reclaim. Tax-exempt investors in a PAIF for example, do not bear any tax charge on the rental income which they receive from the fund.

20. An investment fund that invests in property cannot benefit from the PAIF regime without first converting into, or amalgamating with, an OEIC. This entails property and other assets being transferred (or seeded) from one legal entity to another.

21. In 2015 the Scottish Government introduced a seeding relief for AUT’s converting to an OEIC. However, this relief is not available to other types of investment vehicles or investors.

22. While the PAIFs are currently the most likely type of OEIC to which investment funds will be seeking to convert, there are newer types of authorised schemes, such as Co-ownership Authorised Contractual Schemes ( CoACSs), which are also currently the subject of conversions. AUT’s often work alongside PAIF’s, for example acting as feeder funds for large corporate investors (as there is 10% ownership cap for any Body Corporate investing in a PAIF).

Co-ownership Authorised Contractual Scheme - CoACS

23. CoACS were introduced by the UK Government, following publication of their March 2013 UK Investment Management Strategy, introduced in the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013, and the FSA’s rules for the authorisation of Authorised Contractual Schemes.

24. The principle behind the CoACS regime is to bring the UK in line with funds available in other jurisdictions and so encourage funds to be domiciled in the UK. The idea is that this would be achieved by creating a regime that puts CoACS investors in the same position with regard to income and capital gains taxes as if they had invested directly in the underlying fund assets (rather than income on the CoACS itself). This enables each investor to benefit from the same tax treatment in respect of its income and gains as they would have done if they directly invested in the asset themselves.

25. A CoACS is not a legal person and the investors remain responsible for any tax due on their share of the income (and gains) in the fund. This means that investors in a CoACS will receive full access to information about the assets held and their share of income (and gains) received by the scheme in order to meet their own tax obligations. An investor’s tax liability is based on their income from the fund and not directly on the gains and income made by the fund.

26. It is a regulatory requirement that a direct investor in a CoACS must either:

• invest at least £1m, or
• be a professional institutional investor.

27. As these schemes will usually have a mix of international and domestic assets, it generally enables investors to obtain their correct rates of tax under applicable double tax treaties (which is not always the case if they invest in other pooled arrangements). The UK has an extensive network of bilateral tax treaties with 129 countries and territories and these schemes also allow international investors to benefit from double taxation arrangements.

28. The UK has removed this transparency for SDLT purposes to enable unit trading to occur, and therefore allow these schemes to invest in property located in England and Northern Ireland property.

29. The UK applies Genuine Diversity of Ownership ( GDO) ( ^[3] ) rules to PAIFs and CoACS claiming SDLT seeding relief to ensure that narrowly held CoACS in particular cannot benefit from the reliefs and help reduce the risk of tax avoidance.

Question 1: Does this chapter provide an accurate picture of the Scottish property fund and investment landscape?

Question 2: In terms of the size of managed property fund assets in Scotland, how many funds do you estimate hold Scottish property assets, what is the total value of these funds and how large (%) is their exposure to Scottish property?