UK Financial Regulator Approves Property Investment Fund Proposals

by Robert Lee, Tax-News.com, London

27 July 2004

According to a report by Reuters, the UK’s financial regulator has given its blessing to the property industry’s proposals for the creation of new tax-friendly property investment trusts.

Responding to a draft of the Treasury consultation on the introduction of the new property investment funds, or Pifs, the Financial Services Authority has indicated that it is in favour of closed-ended, publicly listed funds, the news service reported.

The regulation of the new Pifs will almost certainly fall within the jurisdiction of the FSA, and its views are therefore likely to be highly influential in the Treasury’s final decision on the format of the trusts.

However, contrary to the joint vision of the new funds advanced by the UK’s main property industry bodies, the FSA is said not to be in favour of high levels of leverage or unlisted funds, as this may expose retail investors to unacceptable levels of risk in what is seen as a generally low risk investment vehicle.

The FSA has not stipulated a minimum level of earnings that must be distributed to investors via dividends, believing that firms should be given the flexibility to adjust for changing maintenance cost.

This differs somewhat from the Treasury’s view that a minimum of 90% of income should be distributed to investors. The Treasury view has not been well received by the property industry, which also favours more flexibility.

The new property funds have been loosely modelled on US real estate investment trusts (REITS) which are exempt from tax on rental income and capital gains, and pay tax on distributed dividends at the taxpayers' own rate.

The government’s consultation with the property industry ended on July 16, and it is anticipated that trading could begin in the new funds from late 2005 or 2006.

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