Consultation’s effect on property fund structures - comment

A narrowly-focused consultation document published by the UK Treasury may turn out to have a favourable impact on some property fund structures based in the UK.
Richard Croker, senior consultant at Pinsent Masons. Picture: contributed.Richard Croker, senior consultant at Pinsent Masons. Picture: contributed.
Richard Croker, senior consultant at Pinsent Masons. Picture: contributed.

The consultation is part of a promised wider review of the UK funds regime, with an aim to make the UK a more favourable jurisdiction for “alternative” fund structures, meaning those not subject to investor protection regulation and typically invested in by pension funds, insurance companies, family offices and others – which includes many property funds.

Due to the Covid-19 crisis, the consultation period was extended into August, although the government has not indicated that the crisis changes any of its objectives as regards the consultation.

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This is a pragmatic response to representations over recent years, including those arising out of the introduction of capital gains tax for non-residents on UK real estate in 2019 and threats and opportunities in both tax and regulatory arenas as a consequence of Brexit. The review is intended to make the UK better able to compete with established fund regimes in other jurisdictions such as Ireland and Luxembourg within the EU, and potentially those in offshore territories. This could result in some fine tuning or perhaps more radical change.

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The Budget red book made clear that the wider review will “include the VAT treatment of fund management fees and other aspects of the UK’s funds regime”. The consultation document went on to promise it will include “taxation and relevant areas of regulation to ensure the ongoing competitiveness and sustainability of the UK regime”. So there is more to come.

For now, the government wants this targeted consultation to improve its understanding of the barriers to funds in the UK corporation tax system to the establishment of intermediate holding structures – characterised as asset holding companies – in the UK compared with other jurisdictions.

The asset holding company is typically one or more corporate entities intermediate between a fund vehicle, such as a limited partnership or equivalent, and the underlying investments of the funds – which may be corporate equity, debt or real estate. Some such funds will invest in assets across multiple jurisdictions but others may be focused on a single jurisdiction or asset class within that territory.

The consultation details challenges the Treasury has been made aware of in the context of real estate funds. These include perceived limitations in the expanded substantial shareholding exemption from corporation tax on gains for investment holding companies 80 per cent owned by qualifying institutional investors (QIIs). That holds out the prospect of expanding the QII definition or moving towards a broader participation exemption for such companies.

Another issue is whether the tax treatment of flows of rental income through a UK asset holding company negatively affects the choice of the UK as a jurisdiction, especially where UK property is the target asset.


Assuming the typical asset holding company is liable for tax on income, the consultation asks whether the expansion of the UK real estate investment trust (Reit) regime could assist here, perhaps by its expansion to unlisted companies. It specifically suggests that such a revised Reit might be a suitable vehicle to replace the Jersey property unit trust as a vehicle of choice for UK property investment by exempt and other investors.

Among general challenges that the consultation considers may apply to all alternative funds is the imposition of withholding tax on distributions of UK source interest by UK companies. It notes the quoted eurobond exemption and private placement rules along with double tax treaty provisions, and says that such rules mean there is limited application of withholding in practice for UK holding companies. If that is right, the burden is therefore not the tax cost per se but the administrative cost of meeting exemption requirements.

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The consultation asks for views on the extent of the problem but does not hold out the prospect of any solution. The complex UK source rules, based as they are on case law, do not get a mention here but could also be an area where representations are made, particularly in the context of property funds.

The industry should be mindful that one possible solution for the Treasury would be to level the playing field by withdrawing advantages for non-UK asset holding companies, rather than liberalising the rules for domestic ones.

Richard Croker, senior consultant at law firm Pinsent Masons

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