IFM04170 - Property authorised investment funds (PAIFs): introduction and conditions of membership for the regime: the corporate ownership condition

Regulations 69K and 69L SI 2006/964 set out the corporate ownership condition. The purpose of this condition is to ensure that the UK retains the ability to tax investors on income from UK land and property. This requires that corporate investors should not hold 10% or more of the fund by net asset value.

Limits to be imposed by the PAIF on its investors

The prospectus and instrument of incorporation must include provisions requiring corporate shareholders to undertake not to acquire 10% or more of the share capital of the fund and also to reduce their holding should they become aware that it has reached 10% or more.

Reasonable steps

The PAIF must also take reasonable steps to ensure compliance with the prohibition by corporate investors. Some PAIFs may choose to simplify the operation of this process by prohibiting all direct investment by corporate investors. Such a PAIF will still need to take reasonable steps to check that it does not have corporate shareholders. Examples set out below are not exhaustive but if a PAIF has carried out the steps set out below then it will be treated as meeting condition A of regulation 69K SI 2006/964.

Examples of reasonable steps include:

  • regularly reviewing the register, which should be undertaken at least once every distribution period
  • setting up a mechanism to ensure that corporate investors and potential investors are kept informed of the requirement that they must not hold 10% or more of the shares (by value) in a PAIF at any time.
  • setting up a mechanism to warn corporate investors that get close to a 10% or more holding.
  • where a PAIF becomes aware that a corporate investor has a 10% or more holding then the fund manager must notify the corporate investor immediately, must not pay them any income distribution and must redeem or cancel the investor’s holding down to below 10% of the net asset value of the PAIF within a reasonable timeframe. A reasonable timeframe means the period of time which the fund manager reasonably considers to be appropriate with regard to the interests of other investors in the PAIF and should be explained to HMRC so that it can be satisfied that a reasonable timeframe will be adhered to.

Further requirements of regulation 69K SI 2006/964

Under conditions B and C of regulation 69K the PAIF must include requirements in its documentation that any body corporate which becomes a beneficial owner in shares:

  • certifies that it is the beneficial owner,
  • gives an undertaking not to hold 10% or more of the share capital, and
  • gives an undertaking that, should it inadvertently acquire such a holding (this could happen when the PAIF reduces in size as other investors dispose of holdings), that it will reduce it to below 10%.

Corporate nominees (regulation 69K SI 2006/964)

Under condition C a corporate nominee must certify that it does not hold 10% or more of the share capital on behalf of itself or any other corporate body and that it has obtained corresponding undertakings to those above from its corporate clients (that is the beneficial owners of the shares held by the nominee).

Under condition D the corporate nominee must undertake to disclose to the fund manager on request the names and the extent of the holding in the PAIF held by any of its corporate clients.

Cases where all corporate investors are prohibited by the PAIF (Regulation 69L SI2006/964)

Where the prospectus and instrument of incorporation contain a prohibition on all corporate investors then it will still be necessary for reasonable steps to be taken by the PAIF to ensure that there are no corporate beneficial holders.

Shares may, nevertheless, be held by a corporate nominee on behalf of non-corporate beneficial owners, providing that the corporate nominee certifies that its clients are not bodies corporate (and that it does not hold shares on its own behalf) (regulation 69L(1) to (4) SI 2006/964).

Indirect holdings via a ‘feeder fund’

While the effect of the regulations is to prevent corporate bodies from beneficially holding 10% or more of a PAIF, it is still possible for a corporate body to have an indirect interest of 10% or more in a PAIF by holding units in a (non-corporate) ‘feeder’ fund (regulation 69L(5) SI 2006/964), such as a unit trust. The feeder fund must be the beneficial owner of the shares in the PAIF and not the corporate body holding the units in the feeder fund.

In cases where shares in the PAIF are held by the trustees of a unit trust scheme and those trustees are chargeable in their capacity as trustees of the scheme to tax in the United Kingdom then regulation 69L(5) SI 2006/964 provides that the unit trust scheme shall be regarded as the beneficial owners of the shares.