Moderator: Matthew Roach, partner, KPMG, member of the AREF Tax Committee
Speakers/panel:
James Konya, Senior Policy Advisor, HMRC
Nick Burt, Tax Partner, CMS CMNO, member AREF Tax Committee
John Powlton, Head of Real Estate Tax, M&G, member AREF Tax Committee
Not surprisingly, we had a capacity crowd for this event, kindly hosted by Link Asset Services. This note gives a high-level summary of the event and features some of the issues raised during the Q&A session.
There was a welcome from Chris Cattermole, Head of BD, Alternatives, at Link Asset Services, followed by a brief intro from our moderator, Matthew Roach. Matthew took us through the consultation process the AREF Tax Committee had been through with HMT/HMRC, the proposed timeline for the tax changes and a summary of what the changes are for both direct disposals and indirects. He also outlined the potential reliefs and exemptions available.
Before moving on to the speakers, Matthew conducted a live poll of the audience. The first question for delegates was whether they thought the CGT changes had killed the JPUT - 84% responded ‘No’. Delegates were then asked “Will the NRCGT changes make UK fund structures (such as PAIFs/ACS/REITs) more or less attractive?” 68% thought they would be more attractive, 24% thought they would stay the same.
James Konya then talked delegates through the background to the wider policy and to changes relating to collective investment vehicles, where the consultation process identified two key issues; taxation of exempt investors and multiple charges within a fund structure. He then explained the scope of the rules and an overview of the default rules for collectives. There followed detail around the transparency election and the exemption election. James closed with the exemption on indirect disposals of UK land by UK REITs.
Nick Burt brought the new legislation to life with a number of practical examples. He explained what the transparency election would mean, whereby an offshore collective investment vehicle is treated as a partnership. He presented two useful graphics, contrasting the effects on different categories of investor of a JPUT either electing or not electing to be transparent with regards to taxable gains on disposals and potential discounts to NAVs that may result from discounting latent gains. Nick then went through several illustrations to explain the exemption election and what it means in practice, finishing with a focus on REITs.
Matthew went on to moderate the panel session, where the speakers were joined by John Powlton. Delegates had been able to submit questions throughout the event on the app used for the audience polling.
John began by highlighting the potentially challenging timing of the proposed legislation implementation, given Brexit. Among the questions asked, James revealed that by the end of the year HMRC will publish guidance on direct and indirect disposals of UK land by non-UK residents (in the CG manual), and separate guidance on the funds-specific issues of non-resident capital gains. A popular question submitted asked whether the panellists had seen a marked increase in new vehicles outside Jersey as a result of the CGT changes. ‘No’ was the answer, with any shifts to Luxembourg over Jersey being more about regulation issues post-Brexit.
Following the panel session, Matthew repeated the live poll, to see whether the speakers had changed people’s views. The question around JPUTs gave the same result. It’s clear that the vast majority of people believe the JPUT will survive these changes. On the question regarding the effect on the attraction of UK fund structures, slightly fewer (54%) thought they would be more attractive, with a few more people than previously thinking there would be no effect (33%) – though Matthew remarked that he thought given what was discussed today the ‘stay the same’ vote would have been somewhat higher.
Questions submitted but not answered during the panel session are addressed below:
Where a fund becomes close but this is rectified within 9 months, when (if ever) is tax charged to investors on deemed disposal and reacquisition?
JK - The deemed disposal rules in these circumstances are not designed to be punitive or accelerate the tax point for investors in the fund; they are to protect the UK’s taxing rights (both in terms of the fund remaining UK property rich and maintaining the hallmarks of being a ‘trustworthy’ fund). The tax on a gain on deemed disposal will be chargeable at the point where the investor does actually redeem their interest in the fund. If instead the investor sells their interest on the secondary market, that is also a taxable event – although outside of the remit of these rules and not for the fund to administer.
Is HMRC considering extending QII definition - eg to cover US foundations? Or extending UK exemptions to cover more overseas investors - eg non-EEA charities?
JK - The original policy announcements on the measure were clear that there would be no new exempt groups. Whether this position needs to be considered further will be a matter for ministers, and HMRC will rely on industry to make us aware of issues in this area.
Transparent elected fund (eg JPUT) becomes part held by a life co. If JPUT sells its property, will JPUT pay tax? Or does para 10 only affect the life co.
JK - Para 10 applies purely from the perspective of the life company. The fund is a partnership in itself (so is not chargeable to tax as a person) and also from the perspective of other investors (so they will own a proportionate share of the underlying property of the transparent fund).
Exempt structure PAIF and REITS still get the panels vote?
NB - I think of a PAIF as being quite a fact specific option while the REIT is a much wider application. Whether a REIT is going to be a better choice than an exempt fund is going to depend on investors and overall strategy. However, given that the REIT is listed, I think that you need compelling reasons to pick that option over a simpler exempt fund.
Have the panel seen a marked increase in NEW vehicles being created in different jurisdictions (not Jersey) since the new legislation was proposed?
NB - In practice I haven’t seen this. When the rules were announced the uncertainty left clients using existing structures, with a view to restructure post April 2019 if required. As the thinking on CIV rules have developed, my sense is that clients have been comfortable setting up something that is likely to work going forward.
Going forward due to the complexities around D12 I can see more clients opting for a qualifying fund, as opposed to qualifying company approach. And despite the views in the room yesterday I see the regulatory constraints of using existing UK CIVs preventing those vehicles being used for more scenarios than what they currently are.
AREF would like to thank all the speakers/panellists for their valuable contribution, Matthew Roach for his moderating and Link Asset Services for kindly hosting today. AREF would also like to thank the excellent work done by all members of our Tax Committee. This has been a terrific example of how AREF acts as the collective voice of the industry to achieve the optimum business environment for real estate funds, ensuring the best interests of investors are preserved.