IFM04130 - Property authorised investment funds (PAIFs): introduction and conditions of membership for the regime: the property investment business condition

The property investment business condition is contained in regulation 69E of The Authorised Investment Fund (Tax) Regulations 2006 (SI 2006/94).

In order for regulation 69E SI 2006/964 to apply, the open-ended investment company (OEIC) must meet two conditions:

  • the manager must ensure that the OEIC’s instrument of incorporation and prospectus states that its investment objectives are to carry on a property investment business and to manage the cash raised from investors for investment in the property investment business (regulation 69E(2) SI 2006/964); and
  • the OEIC must carry on a property investment business.

For these purposes, a prospectus (or proposed prospectus of a proposed OEIC) includes any supplements to it.

Meaning of “property investment business”

A property investment business (regulation 69F SI 2006/964) must be a continuing business that consists of one or more of the following:

  • It is a property rental business (see below);
  • It owns shares in UK REITs; and
  • It owns shares or units in foreign entities that are equivalent to UK REITs (see IFM04140).

A property rental business is defined in regulation 69H as:

  • A property rental business (as defined in 519 of the Corporation Tax Act 2010); and
  • The relevant business of an intermediate holding vehicle (see IFM04150).

Indirectly held property

Shares or units in UK REITs or overseas equivalents form part of the property rental business. Most other interests in entities that themselves have interests in property do not constitute interests in property, though note the following:

  • Partnerships. A PAIF holding a share of property via a partnership will be treated as holding that property directly. This is because partnerships are transparent for direct tax purposes.
  • Non-resident unit trusts. HMRC’s longstanding approach is that there is no single answer that applies to all non-resident unit trusts, and not even one for all unit trusts established in a particular location. The result depends on the nature of the deed establishing the trust as well as the laws of the jurisdiction under which the trust is set up. Where the trust is transparent, the property held via the unit trust is treated in the same way as partnership property (see above). However, where this is not the case, the property is treated in the same way as property held via a company. The government recently introduced a measure which would apply to property rich offshore funds and which may impact on this area, so HMRC will keep this under review – see IFM19000.