Following the recent upsurge in interest in property funds, the Irish Financial Regulator is currently undertaking a re-write of its property fund rules. In advance of a formal change of the rules, the Financial Regulator has been allowing greater flexibility on a case-by-case basis for new funds. It is our view that this flexibility will lead to new opportunities for property investors.
The regulated property fund structure has a number of advantages. For example:
• Tax: An Irish regulated fund can be advantageous from a tax perspective for both non-Irish residents and Irish residents. The key advantage of the regulated fund is that profits within the fund roll up on a tax-free basis. When profits are distributed or capital returned to investors, there is no Irish tax levied if the investor is a non-Irish resident or is otherwise exempt from Irish tax (for example, pension funds). For Irish resident investors, there is an exit tax of 20% where annual or more frequent distributions of profits are made to investors and a tax of 23% on the profits arising from other chargeable events such as a redemption or other disposal of shares by an investor.
• Use of special purpose vehicles: It can be advantageous to own properties through special purpose companies and, while this has always been recognised by the Financial Regulator, the regulator has recently clarified that for QIFs, the previously imposed limit of one layer of subsidiaries below the fund has now been removed. This will allow greater scope for the advantageous structuring of international property investments through the use of subsidiary companies. It is expected this new flexibility will soon also be extended to PIFs.
• Registration of title: The Financial Regulator’s rules state that the investments of a regulated fund must be registered in the name of an independent custodian. This is a sensible rule to ensure investor protection but can lead to complexities when dealing with real estate assets where properties are often registered in the name of a special purpose vehicle. In addition, custodians have been unwilling to become the registered owners of real estate assets due to potential liability risks. The Financial Regulator has now agreed that, subject to certain conditions, property assets may remain registered in the name of the special purpose company or the fund. This significant change has greatly facilitated the operation of the property funds of our clients.
While many investors may still prefer to invest via the unregulated property fund structures that are available, we are seeing significant interest from investment managers in the Irish regulated product and, in particular, QIFs, which afford the greatest flexibility to investors. Some investors are already benefiting from use of these structures and, with the forthcoming changes to the property fund rules, we expect to see many more regulated property fund structures being created either for the holding of newly-acquired properties or as a vehicle to hold an existing substantial property portfolio.
The main regulatory rules
• An independent custodian must be appointed by the fund to be responsible for the safe keeping of the investments.
• The fund may invest directly in property or in property-related assets, such as the shares of property companies or property derivatives such as property index certificates.
• The fund must appoint an independent valuer and the fund must be valued at open market value at least twice yearly.
• The fund may be open ended (indefinite life and allowing redemption of investment at specified dates), closed ended (a fixed-life fund with no redemptions permitted until fund liquidation) or limited liquidity (hybrid between the two, being effectively a closed-ended fund that may allow limited redemptions).
For further information, please contact David Williams at dwilliams@lkshields.ie
Irish Regulated Fund Structure for Investment in UK Property
