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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Property authorised investment funds (Property AIFs): introduction and conditions of membership for the regime: the property investment business condition

In order for regulation 69E SI 2006/964 to apply, the open-ended investment company (OEIC) must meet two conditions:

  • the manager must ensure that the OEIC’s instrument of incorporation and prospectus states that its investment objectives are to carry on a property investment business and to manage the cash raised from investors for investment in the property investment business (regulation 69E(2) SI 2006/964), and
  • the OEIC must carry on a property investment business.

For these purposes, a prospectus (or proposed prospectus of a proposed OEIC) includes any supplements to it.

A Property Investment Business must be a continuing business that consists of one or more of the following (regulation 69F SI 2006/964):

  • a Property Rental Business (see below),
  • owning shares in UK-REITs, and
  • owning shares (which in this context includes units - see regulation 69F(1)(c)) in foreign entities that are equivalent to UK-REITs (see CTM48814).

A Property Rental Businessis defined in regulation 69H SI 2006/964 and in section 104(2) FA 2006 for UK-REITs and includes:

  • a Schedule A business (within the meaning of section 832(1) ICTA)

an overseas property business (within the meaning of section 70A(4) ICTA)

  • an intermediate holding vehicle (see CTM48815).

but subject to specified exclusions listed in Schedule 16 FA 2006.

Part 2 of Schedule 16 provides a list of items normally within a schedule A or overseas property business but which are specifically excluded from the Property Rental Business. These are:

  • rent in respect of electric line wayleaves
  • rent in respect of the siting pipelines for oil or gas
  • rent in respect of the siting of a communications mast (eg: for mobile telephones)
  • rent in respect of the siting of a wind turbine
  • income in respect of interest in a limited liability partnership where section 118ZA(4) ICTA (winding-up) applies.

Schedule 16 excludes dividends from UK-REITs from the property rental business. However, dividends paid from the tax-exempt business of the UK-REIT are separately included in the Property Investment Business, as explained above.

Part 1 of Schedule 16 excludes the provision of services in connection with overseas property where the services would not fall within Schedule A if the property was in the United Kingdom. It also excludes entering into structured finance arrangements to which section 774B or section 774D of ICTA applies (factoring of rent and other income).

Given that a Property AIF will not be carrying on a trade, and cannot be part of a group for tax purposes (regulations 94(5) and 107 SI 2006/964), the other provisions in Part 1 of Schedule 16 will not affect a Property AIF.

Indirectly held property

Subject to the points below, an interest in an entity that itself has interests in property, does not constitute an interest in property for the purposes of the property rental business, except in the circumstances explained above where holdings in a UK-REIT, foreign equivalent or intermediate holding vehicle can still form a part of the tax-exempt business.

  • Partnerships - a Property AIF holding a share of property via a partnership will be treated as holding that property directly. This is because partnerships are transparent for direct tax purposes.
  • Non resident unit trusts - There is no single answer that applies to all non-resident unit trusts, and not even one for all unit trusts established in a particular location. The result depends on the nature of the deed establishing the trust as well as the laws of the jurisdiction under which the trust is set up.

Where the trust is transparent, the property held via the unit trust is treated in the same way as partnership property (see above). However, where this is not the case, the property is treated in the same way as property held via a company.

Whether the trust is transparent or not depends upon the nature of the trust deed and local law. It is the responsibility of the unit holder to seek advice on the basis of applicable law, and to be prepared to share correspondence on the subject with HMRC if questions are asked.