Policy paper

Stamp Duty Land Tax: property investment funds

Published 9 December 2015

Who is likely to be affected

Managers of and investors in Property Authorised Investment Funds (PAIFs) and Co ownership Authorised Contractual Schemes (CoACSs).

General description of the measure

The measure will introduce a 100% relief from Stamp Duty Land Tax (SDLT) for the ‘seeding’ (initial transfer) of properties into an authorised PAIF or CoACS. The measure also introduces changes to the SDLT treatment of CoACSs, so that an SDLT charge does not arise on transactions in units.

Policy objective

This measure supports the government’s objective of making the tax system more competitive and making the UK a more attractive location for the management and domicile of PAIFs and CoACSs.

The measure also supports the government’s objective of making the tax system fairer, by:

• ensuring that an SDLT charge does not occur when underlying economic ownership of property in PAIFs or CoACSs does not change
• ensuring CoACSs are treated in the same way as PAIFs for SDLT purposes

Background to the measure

At Budget 2014 a consultation was announced, which was published on 18 July 2014, entitled ‘Stamp Duty Land Tax: rules for property investment funds’.

At Autumn Statement 2014 the government announced it intended to make these changes, subject to the resolution of potential avoidance issues, and a response document to the 2014 consultation was published on 11 December 2014. At March Budget 2015, this announcement was reiterated.

Further informal consultation was conducted with stakeholders during summer 2015.

Detailed proposal

Operative date

The measure will have effect on and after the date of Royal Assent to Finance Bill 2016.

Current law

A PAIF is a form of Authorised Investment Fund whose investment portfolio comprises predominantly real property or shares in UK Real Estate Investment Trusts .

The transfer of property into a PAIF, including ‘seeding’ it with a start-up portfolio, is usually subject to SDLT as the PAIF acquires an interest in land. Currently properties held in existing PAIFs or certain types of collective investment schemes can be transferred into a new PAIF without a charge to SDLT. However any properties transferred into a PAIF that are not held in such a scheme or fund will be subject to SDLT.

CoACSs are a type of collective investment scheme that can invest in property. CoACSs are transparent for SDLT purposes. This means that SDLT would be charged every time property is acquired or disposed of or units are redeemed, as this gives rise to a change in ownership of the underlying units in the scheme.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to alter the SDLT treatment of CoACSs. A CoACS will no longer be transparent for SDLT purposes, so that a change in the ownership of the units will not give rise to SDLT, but SDLT will apply when a CoACS acquires a property. An SDLT charge at market value will apply to acquisitions of property from connected parties. The legislation will also make the operator, as opposed to the unit holders, responsible for filing and payment of SDLT including any tax clawed back.

The Genuine Diversity of Ownership (GDO) rules that are currently applied to PAIFs will also be applied for the purposes of a CoACS claiming SDLT seeding relief, to ensure that narrowly held CoACS cannot benefit from seeding relief.

A new seeding relief will be introduced for the initial transfer of properties into an authorised PAIF or a CoACS in return for units in the scheme.

The relief will have the following design:

• a defined seeding period of 18 months within which seeding transactions are eligible for relief, provided that:
  • the fund has not yet been opened to investors
  • the sole consideration for a transfer is units in the fund acquiring the property portfolio
• a ‘portfolio test’ limiting the application of the relief to transactions where a minimum number of properties and a minimum value of properties are transferred, in order to eliminate the risk of enveloping:
  • for non-residential property, the minimum value will be £100 million and the minimum number of properties will be ten
  • for residential property, the minimum value will be £100 million and the minimum number of properties will be 100
  • for funds with a mix of both residential and non-residential properties, a percentage test applies. If the total value of residential property in a portfolio is less than or equal to 10% then the non-residential requirements must be met. If the total value of residential property in a portfolio is greater than 10% it is the residential requirements which must be met
• a mechanism to recover (‘claw back’) from the fund the SDLT that had been relieved, where:
  • the fund ceases to qualify as an authorised PAIF or CoACS, including meeting GDO conditions
  • the portfolio test is not met at any time within 3 years of the end of the seeding period
• a mechanism to recover the SDLT that has been relieved in proportion to what was originally claimed where:
  • some or all of the units received in consideration for the initial seeding are disposed of within 3 years of the end of the seeding period (a ‘first in, last out’ principle will be applied, so that the ‘seeded’ units are treated as the last units to leave a fund on disposal)
  • a ‘seeded’ property is occupied by a person connected with the fund

Where SDLT is recovered from a PAIF, the fund itself will be wholly liable for any tax when the relief is clawed back and will be required to make a return of the tax due. Where SDLT is recovered from a CoACS, the scheme operator will be liable.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020
-10	-15	-10	-5	-5

These figures are set out in Table 2.1 of March Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside March Budget 2015.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to have any impact on individuals, households and family formation, stability or breakdown.

Equalities impacts

This measure is not expected to have any impact on protected groups.

Impact on business including civil society organisations

The administrative burden on business as a result of this change is likely to be negligible as the additional information required by HM Revenue and Customs (HMRC) for seeded properties is very small. Also current reporting mechanisms will be adapted to take account of these changes which will also have a negligible impact on fund level administrative costs.

The main beneficiaries will be life and pension companies, charities and other tax exempt investors that invest in property. They will all benefit as a result of SDLT cost reductions which may subsequently be passed on to beneficiaries of these organisations.

Operational impact (£m) (HMRC or other)

It is anticipated that implementing this change will incur negligible additional costs for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected groups.

Further advice

If you have any questions about this change, please contact the HMRC Stamp Taxes Policy Team on email: catherine.dampier@hmrc.gsi.gov.uk.