UK: Draft Finance Bill Implications For The Property Industry

Last Updated: 4 April 2012
Article by Claire Perrett

There are a number of provisions included within the draft Finance Bill 2012 tailored to the property sector.

Notably, REITs were singled out for overhaul, notice given of possible changes to property alternative investment funds (PAIFs), and refinements made to the capital allowance claims process on second -hand fixtures.

It is perhaps heartening to see that thought is being given to encouraging investment into property with a driver being tax efficiency.

The changes in brief


  • The abolition of the 2% conversion charge.
  • Allowing REITs to list on AIM and Plus Markets and their overseas equivalents. (Private REITs are not permitted).
  • Introduction of a grace period to meet the non-close company requirement (a tax technical term), the strategy being that a close company will be permitted to convert to REIT status, provided it attracts sufficient investors over the first three years so that it becomes nonclose within that three-year period.
  • Introduction of diverse ownership rules where an institutional investor will not automatically make a REIT a close company. The effect, it is hoped, will increase sources of capital.
  • A recognition of current lack of supply and stagnation in the property market, by the removal of the requirement to reinvest cash within two years of receipt.
  • A lengthening of the time limit from three to six months for distributions to be made from the REIT, where the requirement to distribute at least 90% of profits is met in the form of stock dividends in lieu of cash.
  • A refinement to the assessment of whether a REIT has met the financing condition, to only consider excess finance costs.


In common with REITs, the take up for PAIFs has been unspectacular. To kickstart their use, measures in the Finance Bill 2012 outline how it is to be made easier for funds to convert to the PAIF tax regime.

Broadly, the Government intends to enable investors to exchange units in a dedicated PAIF feeder fund for units in the PAIF directly without triggering capital gains tax (CGT). Similarly, the movement from an underlying PAIF to a feeder PAIF will not create a CGT charge.

These suggested changes follow an initial consultation, with further discussions to follow. To date, only a very small number of PAIFs have been launched. They all have high minimum investment levels and exclude retail investors.

It is understood that a number of property funds are considering conversion to PAIFs. In particular, the changes should enable the smaller retail investors to include PAIFs in their portfolios.

These changes to PAIFs and REITs taken together, may mark the beginning of a policy shift to unlock investor money – time will tell.

However, these measures are perhaps a 'slow burner'. Radical change may be required to encourage funds or wealthy individuals to invest in property outside of London and the South East.

Capital allowances

One other area worthy of mention relating to property and the Finance Bill 2012 is capital allowances. As ever, the rules on claiming allowances have been altered, on this occasion to deal with a perceived potential for abuse around claims made for 'historic' spend. When fully implemented, the new rules mean:

  • capital allowance claims on secondhand fixtures purchased after implementation will only be possible if relevant expenditure has been pooled prior to the transfer and
  • the purchaser and seller either agree a value for fixtures within two years of the transfer, or one party to the transaction makes application within those two years to a formal process to agree their value.

The significance is that capital allowances can no longer be an afterthought. The interesting element here is will a nontax payer (pension fund) incur time and expense dealing with capital allowances, and will any negotiation on values be affected by the potential need to undergo a formal valuation process at Tribunal? It would have been encouraging to see some form of relaxation of the rules where a non-tax paying entity is involved in a transaction.

The Finance Bill 2012 is due for Royal Assent in July 2012, consultation continues and what the above shows is that representations are being listened to, some more than others. We will follow up on developments and the law when enacted in due course.

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.

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