IFM04110 - Property authorised investment funds (PAIFs): introduction and conditions of membership for the regime: introduction

What is a Property authorised investment fund (PAIF)?

A PAIF is an open-ended investment company (OEIC) whose investment portfolio comprises predominantly real property or shares in UK Real Estate Investment Trusts (UK REITs) and certain other similar entities (see IFM04130 for further details).

The intention of the PAIF regime is to tax investors in a similar way to those that invest directly in the underlying assets and to remove tax barriers in the way of collective investment in rental property. The regime exempts property income and gains within the PAIF from corporation tax, similar to the way the UK REITs regime exempts property income and gains from corporation tax for companies that are not collectives.

For an AIF to be within the PAIF regime it must:

  • be an open-ended investment company (OEIC);
  • have given notice to HMRC to come within the PAIF regime which is set out in Part 4A of SI 2006/964 (The Authorised Investment Fund (Tax) Regulations) and explained in this guidance at IFM04220; and
  • meet certain conditions (set out in Part 4A of SI 2006/964 and also detailed in this guidance at IFM04130 to IFM04190).

PAIFs - income

PAIFs may have a mix of income (they are only required to derive 60% of their net income from the property income business). A PAIF’s total income will fall into one of the three pools:

  • property income (including property income from UK REITS and foreign equivalents);
  • ‘other taxable income’ (primarily interest and non-UK dividends); and
  • ‘UK dividend income’.

Investors may receive three different types of income distribution from a PAIF.

Property income is ring-fenced as it passes through the fund to ensure that it remains identifiable. This income is tax-exempt in the hands of the fund. It is treated for UK tax purposes, once the expenses of managing the property have been paid, as property income. The investor then pays tax on the property income distribution received as if it were the profits of UK property business (irrespective of whether the property income is derived from the UK or overseas).

The other main form of taxable income likely to be received by a PAIF is interest (or economically equivalent income) on funds invested whilst awaiting opportunities within the property investment business or to provide a convenient buffer for expected redemptions. This category of income also includes foreign dividends, except in cases where these count as property income (see IFM04130 to IFM04150). This income will be within the charge to corporation tax, but the PAIF will be able to get a deduction for tax purposes when it is distributed subject to the usual conditions. For investors, the amount distributed is a PAIF distribution (interest) which is treated for tax purposes in the same way as other savings income (such as interest from a bank account).

The PAIF may also receive dividends from UK companies which are not chargeable to corporation tax. For investors the amount distributed is a PAIF distribution (dividends) and this income is treated for UK tax purposes as if it is UK dividends.

In general, investors will pay approximately the same level of tax as if they had invested directly in the underlying assets. To achieve this a PAIF distributes income to investors in up to three ways as outlined above.

The PAIF is chargeable to corporation tax, but the regime enables a PAIF to manage itself in such a way that it should be able to ensure that tax does not ‘stick’ in the fund, but rather all income flows through to the investors who will then be charged to tax at the appropriate rates. There are certain circumstances in which a corporation tax charge could arise to a PAIF – see pages IFM04340 to IFM04360.