IFM04310 - AIFs: Property authorised investment funds (PAIFs): tax treatment of PAIFs and distributions: general principles
Ring-fencing of tax-exempt business (regulation 69X SI 2006/964)
One fundamental concept which underlies the structure of the PAIF regime, which is similar to the UK-Real Estate Investment Trust, is that the activities qualifying for exemption from tax are ring-fenced from other activities carried on by other parts of the PAIF.
For CT purposes, the tax-exempt business of a PAIF is a separate and distinct business from:
- the OEIC prior to entry into the PAIF regime - F (pre-entry);
- the residual part of the PAIF business (not part of the tax exempt regime) – F (residual); and
- the OEIC post-cessation of the regime – F (post-cessation).
Extent of the ring-fence income
The activities that qualify for exemption (and fall within the ring-fence income) relate to the holding of land to generate rental income that comes within the definition of a property rental business – see IFM04130 and the Property Income Manual. It does not include land that is used for trading, such as land held for farming or used for the business of a golf club. It also does not include items of property income which are excluded from the definition of a property business, such as rent in respect of wayleaves for oil and gas pipelines.
Nature of the ring-fence
The ring-fence is a barrier between the tax-exempt activities of the PAIF and any other activities it may carry out. It prevents losses or allowances generated in the tax-exempt part of the PAIF being used to reduce the measure of income arising in the residual part. This is achieved by deeming the part of the PAIF that carries on the tax-exempt business to be a business separate from the remaining part. This caters for instances where the non-tax-exempt part of the business is also in receipt of property income which is not part of a property rental business (such as fees for mobile phone masts).
Similarly, income accruing to the company after entry into the PAIF regime, but which relates to the business before it entered the regime, can only be treated as income relating to the residual part of the business.
The same principle applies equally to expenses, charges or allowances under regulation 69X(4) SI 2006/964.
Transfer pricing
The exemptions for small and medium sized enterprises in respect of transfer pricing as specified chapter 3 of Part 4 of the Taxation (International and Other provisions) Act 2010 are disapplied with respect to a PAIF and its entire business.
Charge to corporation tax (regulation 69Y SI 2006/964)
The net income from the tax exempt part of the PAIF is not chargeable to corporation tax (CT).
The net income from the residual business of the PAIF is within the charge to CT at the funds rate of tax (s614 Corporation Tax Act 2010). However, under the streaming provisions of the regime the residual business will obtain a deduction in respect of other taxable income that is distributed to shareholders as a PAIF distribution (interest). See IFM04330 for details of the rules relating to the calculation of the net income of the residual business.