Although the UK government's decision to introduce tax-friendly property funds has been broadly welcomed by the investment community, there appears to be some concern that the Treasury is leaning towards a structure that could limit their effectiveness.
The new British funds are to be known as Property Investment Funds, or PIFs, and are likely to be introduced next year, after the Treasury has completed a consultation on the issue. They will be broadly similar to US Reits (real estate investment trusts) which are free from corporate tax and capital gains tax, provided that the lion’s share of income is distributed to shareholders. Investors then pay dividend tax at their normal rate.
However, some observers worry that the new PIFs will not provide a cure-all for the underlying problems bedevilling the UK property market. "The PIF is not going to be a panacea and is probably becoming more selective, smaller and almost certainly a lot more expensive to join" than first thought, one City property analyst told the Financial Times.
There are also fears over what the UK government has in mind regarding the how PIFs will work. For instance, the Treasury is said to be favouring a conversion tax (when converting to a tax exempt structure) based on a firm’s property assets, which is likely to be higher than the percentage of capital gains liability.
In addition, it is thought the UK will follow the lead of similar-style property funds in other parts of the world, where development programmes are limited to pacify the concerns of tax-paying property developers.
If the Treasury opts for a similar model to those in place in the US or Japan, then property funds will have to distribute at least 90% of their income to investors. Another potential limitation is possible gearing restrictions that may force highly leveraged firms to sell assets in order to bring down borrowing.
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