PAIFs provide property businesses with an enhanced alternative to REITs. We compare the two regimes and highlight the improvements.

On 6 April 2008, PAIFs, an improved alternative to REITs for UK property businesses, were introduced. The PAIF regime is less restrictive than that of REITs, as the following comparisons indicate, and we expect them to be more popular than REITs once the UK property market improves.

  • A PAIF's tax-exempt property business must represent at least 60% of total assets and income, compared to a more restrictive 75% for a REIT.

  • PAIFs can invest in REITs within their tax exempt property business, including those which are listed foreign equivalents of a UK REIT. REITs are not allowed to include such investments in their exempt business.

  • PAIFs can have multiple classes of distributing and accumulating shares, whereas UK REITs can only have one class of ordinary shares and non-voting fixed-rate preference shares. This affords much greater flexibility for capital structuring.

  • There is no charge for entry into the PAIF regime. REITs have a 2% entry charge.

  • There is no requirement for a PAIF to have a stock exchange listing, but it must be an open-ended investment company incorporated in the UK and subject to regulation by the Financial Services Authority.

  • Where tax does apply to PAIF profits it is at 20%, compared to 28% for a REIT. Thus a property development business (which would not qualify as a tax exempt property business in the REIT or PAIF regimes), could be more favourably taxed in the PAIF regime. Again this is a clear enhancement and tax benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.