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Reserved Investor Fund (RIF): What is it and what are the benefits?

2nd Jul 2024
Following BREXIT, the UK government has been looking at ways to enhance the UKs appeal as a fund domicile for Real Estate.

We have already seen changes to the Real Estate Investment Trust (REIT) regime, to make the same tax advantages available to private REITs, and we now have the Qualified Asset Holding Company (QAHC), which again offers tax efficiencies for investors.

The ongoing government review process also identified an opportunity to create a new unauthorised contractual scheme which will be open to all asset classes, which will be made available to investors who are classified as professional clients or eligible counterparties under Financial Conduct Authority rules (i.e., not retail clients), and have lower costs and more flexibility than the existing authorised contractual scheme (Co-ownership ACS or CoACS).

The reserved investor fund (RIF) was duly introduced in the UK as part of the Finance Act (No.2) 2024.  The detailed regulations and tax rules for the RIF have been published and been through consultation and are anticipated to be implemented through secondary legislation later in the year.

The RIF must have a UK incorporated Operator and a Depositary, and it will be classed as an AIF.

It can invest in any asset class, so it gives investors in an onshore fund access to illiquid assets like real estate, derivatives and other sophisticated financial instruments.

As well as the simplified regulatory requirements for the RIF, which mean it can respond more dynamically to market changes and investment opportunities, a key consideration must be tax efficiency.  Until now, one of the main disadvantages of incorporating an investment fund onshore has been the “double taxation” trap, whereby investor in a UK corporate fund would see the assets taxed at the fund level and then again when they receive their distributions.  This has caused many fund managers to establish their investment vehicles offshore.

The tax advantages of a RIF are expected to be:

  • Transparent for income tax, therefore investors will be taxed on income at their own marginal rate. This will require regular reporting to the investors for tax purposes.
  • Opaque for Capital Gains Tax (CGT). This means that an investor will only be charged on their gain in the RIF units, rather than there being CGT charged on the underlying assets. The RIF itself will not be subject to CGT.
  • A RIF will be treated as a company for Stamp Duty Land Tax (SDLT) purposes, so no SDLT is payable on the transfer of units in a RIF. The RIF will be subject to SDLT on the acquisition of a relevant asset.
  • There are also Stamp Duty Reserve Tax (SDRT) and Capital Allowance advantages for a RIF.

 

RIFs are expected to be available by election under any one of three restricted scenarios:

  • The RIF will be ‘property rich’, meaning that at least 75% of the value of the RIF’s assets will derive from UK property assets;
  • All of the investors in the RIF are exempt from CGT, such as UK registered pension schemes, overseas pension schemes (provided they meet the appropriate requirements) and investors that have sovereign immunity – similar to an exempt unauthorised unit trust (EUUT); or
  • The RIF does not directly invest in UK property or in UK property rich companies.

 

As with any tax efficient vehicle, it is important to ensure that the eligibility criteria are adhered to, and that the correct reports are made in a timely manner and in the correct format to HMRC.

The RIF is expected to be particularly attractive as a fund vehicle for investment in UK commercial real estate and has received the backing of the Association of Real Estate Funds (AREF).

At JTC our London-based Administration, Operator and Depositary teams have deep expertise in administering complex investment structures, leaving investment managers to focus on their investment strategies on behalf of their investors. JTC are at the forefront of regulatory innovation and will be ready to support our clients with the implementation of the RIF regime once available.

If you’re interested in more information on the RIF regime or any of the services provided by JTC, please get in touch to discuss your requirements.

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