Property authorised investment funds (Property AIFs): introduction and conditions of membership for the regime: the genuine diversity of ownership condition
Regulation 69J SI 2006/964 is to prevent the regime being manipulated by a small group of people or a larger connected group who may intend to gain a tax advantage. It sets out six conditions (A to F) that must be met by a Property AIF.
Conditions A and B must be satisfied before notice of entry can be given. They can be satisfied by the inclusion of appropriate binding statements in the fund documentation as explained below. There is an advance clearance process to enable the intended manager of a proposed Property AIF to check that the Property AIF will be able to meet this condition (see CTM48824).
Condition A: The Property AIF is required to specify its intention to make its shares widely available and to specify its intended categories of investor in its instrument of incorporation and its prospectus. These documents will be considered by HMRC when a manager gives notice for the open- ended investment company to join the regime and the notice should be ‘quashed’ (see CTM48823) if the required statements (regulation 69J(2) SI 2006/964) are not set out in the instrument of incorporation and the prospectus.
Condition B: (regulation 69J(3), (8) and (9) SI 2006/964) This requires the target investment market not to be limited to specific investors (or groups of connected investors). On receipt of a notice HMRC should check the intended categories of investor as specified in the documents and if (counting a group of connected persons as one person) the intended investors are restricted to specific and identifiable companies or individuals the notice should be quashed (see CTM48823 for more details).
Regulation 69J(8) and (9) SI 2006/964 provides for HMRC to take into account the intended categories of investors in an associated unit trust scheme described as a feeder fund in establishing whether this condition is met - see CTM48817. You can only do this if the feeder fund has the same manager as the proposed Property AIF and its documentation is included with the notice of entry for the Property AIF (regulation 69J(9) SI 2006/964).
As an example, HMRC does not consider that this regulation rules out a fund that starts out being seeded by only a corporate investor such as single life insurer as an indirect investor via a single feeder fund so that the corporate ownership condition is not breached - see CTM48873. However, as explained below, it must then be available to and marketed to suitable investors for the fund in question including the general public where appropriate. There should be no exclusions of investors of a type within the target market.
HMRC would not seek to exclude a case where the only beneficial investor was a unit trust scheme (feeder fund) providing that the unit trust scheme would, itself, satisfy the genuine diversity of ownership condition.
Connected party in this context takes its meaning from section 839 ICTA (regulation 69J(10)(b) SI 2006/964).
Conditions A and B must continue to apply. In particular, if the fund documents (or the feeder fund documents if these accompanied the notice) are altered in any relevant respect, then it is possible that the fund may fail these conditions. If there is a material change to the fund documents then any clearance that may have been given by HMRC can no longer be relied upon and the manager should inform HMRC of the changes that have been made.
Conditions C, D, E and F: These are, in effect, requirements that the manager continues to act in accordance with the Property AIF’s prospectus to attract investors in its stated target market. These conditions are necessary as the first two conditions can be met by documentation alone and do not require the fund to have actually achieved a spread and number of investors in accord with its prospectus.
Each of these conditions is designed to ensure that the shares are actually available and marketed to all the stated categories of investor.
In considering whether any of these conditions have been breached HMRC should consider:
- what form of marketing is appropriate to reach the intended categories of investor,
- check that information on the Property AIF and access to facilities to purchase its shares, is easily and practically obtainable by a reasonable potential investor within the target market, and
- check that the minimum investment and charges are not set at a level which would deter a reasonable investor within the target market.
If, after considering these points HMRC consider that a Property AIF may be in breach of this condition then the case should be submitted, with full details, to CTIS who will advise on further steps.
There is a clearance arrangement (CTM48824) to enable proposed Property AIFs to check in advance that their proposed arrangements will meet conditions A and B.