Reserved Investor Fund consultation

The Government has published a consultation proposing a new UK fund structure – the Reserved Investor Fund (Contractual Scheme)

A proposed new UK fund structure

On 27 April 2023 the Government published a consultation on proposals to introduce a new unauthorised contractual scheme fund. The proposed Reserved Investor Fund (Contractual Scheme) or RIF will be aimed at professional and institutional investors. The RIF will meet market demand for investment via a UK structure rather than via offshore vehicles (such as the Jersey Property Unit Trust). The intention is that RIF will broadly be based on the existing legislation for Co-ownership Authorised Contractual Schemes (CoACS) but will be designed to provide lower costs and more flexibility for asset managers. RIF is expected to be a suitable vehicle to hold UK real property and much of the consultation focuses on tax matters relevant to real estate investments, including non-resident capital gains tax, capital allowances and stamp taxes. RIF is also expected to be relevant to other asset classes across private and public markets.

Proposed tax treatment of RIF

A RIF will need to meet the Genuine Diversity of Ownership condition or non-close test in order to apply to HMRC to be a RIF. 

Similar to the UK CoACS fund, the RIF is expected to be treated as a ‘transparent’ fund for UK income tax purposes meaning income arises to UK investors as soon as it is received by the RIF. With respect to capital gains tax treatment, the consultation notes there is difficulty in applying the same approach as the CoACS regime to treat units in the fund as subject to capital gains tax rules without modifications, due to non-UK residents potentially investing in UK property.

Non-Resident Capital Gains Tax (NRCGT)

The consultation seeks views on the interaction of the NRCGT rules introduced in 2019. The Government would like the RIF regime to have certainty and simplicity but also to ensure the intentions of the NRCGT rules are applied. The Government is considering introducing a ‘restricted’ RIF, whereby the permitted investors would only be allowed where there is no risk of loss of tax from non-UK resident investors on disposals of UK property. There are three options considered for a restricted RIF. Firstly, a RIF that is UK property rich, secondly, a RIF that is only available to tax-exempt investors and finally a RIF that does not invest in UK property. The consultation also asks for views on an ‘unrestricted’ RIF which may require more complex tax legislation interacting with exemption and transparency election rules but would allow the RIF to be more widely available.

Capital Allowances

The consultation proposes that a RIF would be able to make an election to enable the operator to calculate and apportion capital allowances to investors. However, as is the case with CoACS funds, we would not expect investors to be entitled to first year allowances or full expensing deductions.

Stamp Duty Land Tax (SDLT)

SDLT rules will apply to RIF funds, but the consultation proposes that amendments will be made to these rules similar to those currently available to CoACS funds. Of most significance is a proposed SDLT seeding relief subject to the fund meeting certain conditions and the ability to transfer RIF units free of SDLT.

Annual Reporting

A RIF will be required to prepare annual financial statements in accordance with the Investment Association Statement of Recommended Practice (IA SORP) and will be required to provide annual reports to investors and HMRC.

We will be responding to this consultation, so if you have comments or have questions on these proposals, please speak to the authors of this article or your KPMG in the UK contact by 9 June 2023.