With the announcement to provide further tax breaks on Authorised Contractual Schemes (ACS), there is now another tax transparent vehicle on the block for UK real estate funds to consider. Veritas Advisory, the only Capital Allowances experts to have advised on a property based ACS fund, consider the benefits.
The introduction of a further tax transparent vehicle, was a move by George Osbourne and HM Revenue & Customs to present a carrot to UK property funds, to bring their investments back onshore. This was despite the fact that for many years previous investors already had two alternative tax transparent vehicles to opt for, namely the property authorised investment trust (PAIF) and real estate investment trust (REIT). So what does the ACS offer that these two vehicles do not.
The ACS provides an option for both fund managers and institutions wishing to operate a UK platform as an alternative to authorised unit trusts and open ended investment companies. There are two forms of an ACS, partnership or co-ownership, with the latter being the more popular as it is easier to administrate and can be set up as an umbrella for multiple sub-funds. The ACS is designed to compete directly with offshore vehicles by offering equal tax advantages.
Tax transparent vehicles have traditionally been aimed at pension funds enabling them to withhold tax but there is a wider list of benefits.
Benefits of ACS
Up until the last budget, the two biggest hurdles facing those funds considering a move to ACS was SDLT and capital allowances. Subject to Royal Assent, expected in July 2016, seeding relief will be given for co-ownership ACS vehicles and no SDLT will be payable on the issue, transfer or surrender of units in a co-ownership ACS from the same date. As with a PAIF the fund is open-ended but there are no investment restrictions in the level of property to be held and so can be formed of multiple unit classes.
One of the main draws in converting is that it will enable the fund manager to pool and administer multiple funds under the one tax transparent umbrella. This is particularly attractive to enable fund managers to head off regulatory changes and increase administration cost pressures. Whilst there is no doubt that such a move comes with some initial pain, the long term gains may for some, make it a worthwhile option.