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HMRC internal manual

Company Taxation Manual

Property authorised investment funds (Property AIFs): introduction and conditions of membership for the regime: introduction

Reference to these pages

These pages should be read as part of the guidance published in respect of ‘The Authorised Investment Funds (Tax) Regulations 2006’ (SI 2006/964), which can be found in the Company Taxation Manual at CTM48000 onwards. The material at CTM48000 applies to property authorised investment funds (Property AIFs) in the same way as to other authorised funds, except as set out in Part 4A of the regulations (inserted by SI 2008/705) and explained in the following chapters. All authorised investment funds (including Property AIFs) are Collective Investment Schemes which are regulated by the Financial Services Authority (FSA) under the terms of the Financial Services and Markets Act 2000 (FSMA00). For further information on the definition of a Collective Investment Scheme please refer to the Company Taxation Manual at CTM48105.

What is a Property AIF?

A Property AIF is a form of Authorised Investment Fund whose investment portfolio comprises predominantly real property or shares in UK Real Estate Investment Trusts (UK- REITs) and certain other similar entities (see CTM48813 for further details).

The intention of the Property AIF regime is to tax investors in a similar way to those that invest directly in the underlying assets and to remove tax barriers in the way of collective investment in rental property. So, the regime exempts property income and gains from corporation tax, similarly to the way the UK-REITs regime exempts property income gains from corporation tax for companies that are not collectives. This then allows an open-ended fund to be exempt from corporation tax on property income and gains in a similar way to that achieved for UK-REITs.

As Property AIFs may have a mix of income (they are only required to derive 60% of their net income from the property income business), it is necessary to ring-fence fence property income as it passes through the fund to ensure that it remains identifiable. This income is tax-exempt in the hands of the fund. It is treated for UK tax purposes, once the expenses of managing the property have been paid, as property income. The investor then pays tax on the amount received as if it were the profits of UK property business (irrespective of whether the property income is derived from the UK or overseas).

The other main form of taxable income likely to be received by a Property AIF is interest (or economically equivalent income) on funds invested whilst awaiting opportunities within the property investment business or to provide a convenient buffer for expected redemptions. This category of income also includes foreign dividends, except in cases where these count as property income (see CTM48813 to CTM48815). This income will be within the charge to corporation tax, but the Property AIF will be able to get a deduction for tax purposes when it is distributed. It is treated for tax purposes in the same way as other savings income (such as interest from a bank account).

Finally, the Property AIF may also receive dividends from UK companies which are not chargeable to corporation tax. Again, this income is treated for UK tax purposes as if it is UK dividends.

In general, investors will pay approximately the same level of tax as if they had invested directly in the underlying assets. In order to achieve this, the fund must make distributions to investors in a way that enables the investor to identify the amount attributable to the different types of income, and to pay tax on them accordingly.

This means that the fund’s total income will fall into one of the following three pools:

  • property income (including property income from UK-REITS and foreign equivalents),
  • ‘other taxable income’ (primarily interest and non-UK dividends), and
  • ‘UK dividend income’

so that investors will receive three different types of income.

The Property AIF is chargeable to corporation tax, but the regime enables a Property AIF to manage itself in such a way that it should be able to ensure that tax does not ‘stick’ in the fund, but rather all income flows through to the investors who will then be charged to tax at the appropriate rates for property income, savings income and dividend income respectively.

It is not intended that individuals or companies should, in comparison, with direct investment in the underlying assets, gain a tax advantage by investing in a Property AIF and there are, accordingly certain circumstances in which a corporation tax charge could arise to a Property AIF. (These are set out at CTM48834 to CTM48838.)

For an AIF to be within the Property AIF regime it must:

  • be an open-ended investment company (OEIC)
  • have given notice to HMRC to come within the Property AIF regime which is set out in Part 4A of SI 2006/964 (the authorised investment fund regulations) and explained in this guidance at CTM48822 
  • meet certain conditions (set out in Part 4A SI 2006/964 and also detailed in this guidance) at CTM48813 to CTM48819.

Reference to manager of the Property AIF

This guidance, set out in pages CTM48812 to CTM48882, makes reference to the manager or proposed manager of a property AIF. The Authorised Investment Fund regulations (Regulation 6(3)(a) SI 2006/964) defines the manager of an OEIC to be the authorised corporate director.

Further information

If, after reading this guidance, you have any further queries regarding the Property AIF regime please refer them to:

Eric McLennan
Authorised Investment Fund Centre
Local Compliance Eastern England
Concept House
5 Young Street
S1 4LB

Tel: 0114 2969 791