It has been suggested that the introduction of new US style property funds in the United Kingdom could initially net the Treasury around £1 billion in tax revenues.
While the form of these new funds, to be known as ‘property investment funds’ (Pifs) will depend on the results of the government’s consultation with the industry, the deadline for which is Friday, it is thought that the establishment of a Pif will almost certainly involve a one-off tax charge, perhaps along similar lines to French SIIC funds.
Under the French system, property investment firms wishing to convert into a fund must pay tax equal to 50% of unrealised capital gains tax liability. Should this method be adopted in the UK, then the introduction of Pifs could raise the government just under £1.2 billion upfront, according to an early industry draft paper.
Other scenarios, such as the levying of a tax based on the value of the property assets owned by a firm would bring in a similar amount of revenue for the government. If this was charged at 2%, then the Treasury could reap almost £1.4 billion in one fell swoop.
The industry fears that 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.
Such restrictive rules may deter firms from converting into funds, the British Property Federation, the Royal Institute of Chartered Surveyors and the Investment Property Forum warned recently in a joint submission.
The government’s proposals for Pifs will be introduced in November’s pre-Budget report, with legislation expected in either 2005 or 2006.
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