Policy paper

Introduction of tax rules for the Reserved Investor Fund

Published 6 March 2024

Who is likely to be affected

Investment fund management businesses who may wish to establish a Reserved Investor Fund (RIF), as well as the investment funds, institutions, individuals and other entities that may invest in a RIF.

General description of the measure

This measure introduces tax rules for a new type of investment fund for professional and institutional investors.

Policy objective

The RIF is designed to complement and enhance the UK’s existing funds regime by meeting industry demand for a UK-based unauthorised contractual scheme with lower costs and more flexibility than the existing authorised contractual scheme. The RIF will be open to professional and institutional investors. It is expected to be particularly attractive for investment in commercial real estate.

Background to the measure

At Spring Budget 2020, the government launched a review of the UK funds regime. This review has an overarching objective to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments that are better suited to investors’ needs.

On 10 February 2022, the government responded to a ‘call for input’ carried out as part of the review. In the government’s response, it committed to undertaking further work to explore options for the introduction of a new fund structure: an unauthorised contractual scheme. Industry representations suggested that a new unauthorised contractual scheme be known as a Reserved Investor Fund.

The government published a consultation on the scope and design of a tax regime for a RIF on 27 April 2023, as part of Tax Administration and Maintenance Day, and responded to that consultation at Spring Budget 2024.

Detailed proposal

Operative date

This measure will take effect from a date to be determined in a statutory instrument to be laid at a later date.

Current law

Existing provisions modified by this measure are:

• chapters 3 and 4 of Part 3 Taxation of Chargeable Gains Act 1992 (TCGA), which contain provisions for the treatment of investment funds and their investors

• schedule 5AAA of TCGA, which contains provisions for capital gains made by non- UK residents in relation to collective investment vehicles holding UK property

• chapter 3 of Part 6 of TCGA, which contains provisions for insurance companies

• sections 262AA to 262AF and 270IC to 270IF of Capital Allowances Act 2001 (CAA), which provide for simplified administration of capital allowances for Co-ownership Authorised Contractual Schemes (CoACS)

• section 520 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA), which makes provision about personal portfolio bonds

• sections 41 and 42 of Finance Act (No2) 2017 (F(2)A 2017), which provide for HM Treasury to make regulations with respect to information requirements and investments in offshore funds for CoACS

• part 4 of Finance Act 2003 (FA 2003), which contains the rules for Stamp Duty Land Tax (SDLT), which only applies to land transactions in England and Northern Ireland

• section 90 of Finance Act 1986 (FA 1986), which contains rules for SDRT

• paragraph 25A of Schedule 13 to Finance Act 1999 (FA 1999), which contains rules for Stamp Duty

• sections 528 and 535A of the Corporation Tax Act 2010 (CTA 2010), which set out provisions for Real Estate Investment Trusts (REITs)

Proposed revisions

Legislation will be introduced in Spring Finance Bill 2024, with detailed rules being set out in a statutory instrument to be laid at a later date.

The Finance Bill clause will define what a RIF is and provide for a power for HM Treasury to make regulations in respect of RIFs.

The statutory instrument will:

• set out qualifying criteria for RIFs, including entry and exit provisions (and, where relevant, notification requirements)

• set out provisions for breaches and mitigations, where a RIF fails to meet the qualifying criteria

• set out how gains on a deemed disposal and reacquisition of investors’ units will be treated

• for capital gains purposes:

  • amend the rules in section 99A TCGA to include the RIF within the definition of umbrella schemes

  • insert section 103CA TCGA which provides that all co-ownership schemes are treated as a partnership, except for CoACS and RIFs — it also provides for a deemed disposal when the tax treatment of the contractual scheme changes

  • amend section 103D TCGA to extend the current treatment of tax transparent funds to RIFs, where certain conditions are met

  • amend the rules in sections 103E to K TCGA to include the RIF, so that it can access the provisions for exchanges, mergers and reorganisations

  • add the RIF to section 211(B) TCGA so that insurance companies can invest in RIFs subject to provisions equivalent to those already in place for insurance companies investing in certain other types of investment fund

  • amend Schedule 5AAA of TCGA so that a RIF is treated in the same way as a CoACS in respect of non-UK residents’ capital gains, including being able to make an exemption election

• amend sections 262AA to 262AF and 270IC to 270IF of CAA to extend simplified administration of capital allowances provisions to RIFs

• add the RIF to the list of permitted property categories in section 520 ITTOIA 2005 to allow individual policyholders to select RIFs within their life insurance policy without the policy being classified as a personal portfolio bond

• amend sections 41 and 42 of F(2)A 2017 to also permit HM Treasury to make regulations in respect of information reporting and investments in offshore funds for RIFs

• For SDLT purposes:

  • amend the rules in section 102A FA 2003 to treat RIFs as companies in most instances

  • amend Part 2 Schedule 7A FA 2003 to allow RIFs to claim seeding relief

• amend the rules in section 90 of FA 1986 to extend the current SDRT treatment for authorised contractual schemes to RIFs

• amend the rules in paragraph 25A of Schedule 13 to FA 1999 to extend the current Stamp Duty treatment for authorised contractual schemes to RIFs

• amend the rules for REITs to:

  • add the RIF to the list of institutional investors in section 528(4A) CTA 2010

  • add disposals of units in a UK property rich RIF to the exemption in section 535A CTA 2010

Summary of impacts

Exchequer impact (£million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	negligible	negligible	negligible	-5	-5

These figures are set out in Table 5.1 of Spring Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2024.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will impact those individuals who are able to invest in a RIF and choose to do so. The tax rules applying to the RIF will determine the income and gains they are treated as receiving from the RIF for UK tax purposes. Such individuals will be subject to the normal tax reporting obligations in respect of income and gains but otherwise will not be subject to any additional requirements by this measure.

The measure is not expected to impact on family formation, stability or breakdown.

Customer experience for individuals who invest in a RIF is expected to remain broadly the same as this measure does not significantly alter how they would be required to interact with HMRC.

Equalities impacts

It is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible impact on the managers of an estimated 250 funds who may wish to use the regime.

One-off costs will include familiarisation with the new regime. Continuing costs could include providing HMRC with information, including an annual report, should a fund choose to enter the regime. There are not expected to be any further one-off or continuing costs.

Customer experience for managers of funds which enter the RIF regime is expected to be broadly comparable to the customer experience of managers of other UK fund vehicles, such as CoACS. Guidance will be prepared to aid customers’ interaction with HMRC and help them understand the requirements placed upon them if they choose to notify into the regime.

The measure will also impact businesses which are able to invest in a RIF and choose to do so. The tax rules applying to the RIF will determine the income and gains such businesses are treated as receiving from the RIF for UK tax purposes. Such businesses may incur one-off costs relating to familiarisation with the new regime. No other one-off costs or continuing costs are expected.

Overall, customer experience for businesses who invest in a RIF is expected to remain broadly the same as this measure does not significantly alter how they would be required to interact with HMRC.

The measure is not expected to have an impact on civil society organisations.

Operational impact (£million) (HMRC or other)

This change will result in operational impacts for HMRC that are estimated to cost in the region of £1.9 million.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through ongoing communication with affected taxpayer groups and the collection of information through information reports and, where relevant, tax returns submitted to HMRC.

Further advice

If you have any questions about this change, contact the Financial Services Policy Team at [email protected].