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HMRC internal manual

Investment Funds Manual

Conversions and exchanges: Property authorised investment fund and dedicated feeder fund

A property authorised investment fund (PAIF) is an open ended investment company that has to satisfy a number of conditions including the corporate ownership condition which provides that no body corporate investor may hold 10% or more of the net asset value of the PAIF. Regulation 69L of the Authorised Investment Fund (Tax) Regulations 2006 (AIF Tax regs) provides that such a body corporate investor may invest in a unit trust scheme that in turn invests in the PAIF and in this way effectively hold 10% or more of the PAIF. For more detail on this see IFM04170.

Reg 69Z24E of the AIF Tax Regs provides that where a fund (the pre-conversion fund) which is not a PAIF, intends to convert to a PAIF and as part of an arrangement the unitholders in the pre-conversion fund dispose of their units in that fund and acquire units in a fund that is or is intended to be a dedicated feeder fund for the PAIF, sections 127 to 131 of TCGA apply to the disposal and subsequent acquisition of units. Unitholders are treated as not having disposed of their units in the pre-conversion fund and as having acquired units in the dedicated feeder fund at the same time they acquire their units in the pre-conversion fund.

The same outcome may be achieved with a reconstruction under s 103H see IFM16230.

While s103F Case 1 allows an investor to exchange units in a scheme for other units in that scheme without that being a tax disposal, neither that section nor any other section in Chapter 4 allows an investor to exchange units in a fund for units in a different fund without that being a tax disposal.

In the case of a PAIF and its dedicated feeder fund, Reg 69Z24F of the AIF Tax Regs provides that:

  • An investor may exchange units in a dedicated feeder fund for shares in the PAIF for which that fund is the dedicated feeder fund;
  • An investor may exchange shares in a PAIF for units in the dedicated feeder fund for that PAIF

and sections 127 to 131 of TCGA apply so the investor is treated as not having a disposal of their original units and as having acquired the new units at the same time as their original units.

The units to be exchanged must represent the same or substantially the same net asset value of the PAIF as the units to be held after the exchange.