A new UK-based unauthorised fund vehicle now available - The Reserved Investor Fund

The new UK fund vehicle Reserved Investor Fund (RIF) is available beginning today, 19 March 2025. 

The RIF is available for all investment strategies, but what might make it an appealing option, particularly certain tax features, is likely to be different for UK real estate investment than for all other strategies (including non-UK real estate). 

The RIF regime has been designed specifically to provide various advantageous tax treatments for UK real estate investment. With that comes concerns from the UK government about potential abuse and loss of taxing rights in relation to non-UK residents. The RIF regime therefore has complex rules intended to protect the UK’s taxing rights in relation to UK real estate.

By contrast, fewer UK tax benefits of the RIF regime are as relevant for other investment strategies. However, with that comes a much simpler regime for those strategies. From a tax perspective, this makes weighing the pros and cons of a RIF simpler for such strategies than for UK real estate investment. 

On the non-tax side, the primary benefits of the RIF are expected to be lower costs and greater flexibility and speed to market than certain other fund vehicles and regimes. For instance, RIFs do not need to register with Companies House and do not require any approval from or registration with the Financial Conduct Authority (FCA). 

In overview, we anticipate that a RIF will be of greatest appeal: 

• For investment strategies other than UK real estate, where the fund’s investor base is predominantly UK investors and non-UK investors with a strong preference for a UK-based “onshore structure” (though we expect that an English limited partnership will remain a strong contender in those circumstances) 
• For UK commercial real estate investment strategies where the investor base is predominantly UK investors and/or those preferring a UK-based onshore fund structure 

This client alert provides a high-level overview of key aspects of the RIF regime and covers the following: 

1. What is a RIF? 

2. What are the main drivers for introducing a RIF? 

3. What are the conditions for becoming a RIF? 

4. What is the UK tax treatment of a RIF? 

5. When is a RIF expected to be most attractive? 

6. Final thoughts 

This alert provides a high-level overview only, and there are many small details in regulations governing the specific tax regime applicable to a RIF, which we have not sought to cover. Also, HMRC guidance is expected in due course and may clarify certain details. 

1. What Is a RIF?

A RIF is a type of co-ownership scheme that satisfies certain conditions and is based in the UK. Its legal form is that of a contractual scheme; as such, a RIF itself has no legal personality. Legal title to assets of the RIF is held by (or to the order of) a depositary, and investors in the RIF are the beneficial owners of those assets. A RIF can be either closed-ended or hybrid (with “soft” redemption rights). 

The RIF also has specific UK tax features designed to enhance its attractiveness as a fund vehicle. We explore these features in Section 4 below. 

The RIF is “unauthorised” but must be both a collective investment scheme (CIS) and a UK alternative investment fund (AIF) to qualify as RIF. It will therefore need a UK alternative investment fund manager (AIFM). In contrast to a fund vehicle that is authorised by the FCA, such as a long-term asset fund (LTAF),¹ the RIF is an unregulated collective investment scheme that does not have to be FCA-authorised itself (although its AIFM and the depositary must be). 

As a non-EEA AIF, the RIF will not benefit from the AIFMD marketing passport, and marketing within the EEA will use the national private placement regimes. The UK financial promotion rules will apply to any marketing conducted in the UK, and the RIF will be treated as a Non-Mass Market Investment that can be promoted to certified high-net-worth individuals, certified and self-certified sophisticated investors, and professional investors. 

2. What Are the Main Drivers for Introducing a RIF? 

In short, the main drivers are lower costs to run the fund and greater flexibility and speed to market compared to existing UK co-ownership vehicles (and certain other fund vehicles or regimes), in addition to various special UK tax features. 

The UK already has a form of authorised contractual scheme — a co-ownership authorised contractual scheme (CoACS) — but the authorised nature of that vehicle can be restrictive and may also mean operational costs are higher than those of non-UK alternatives, such as the Luxembourg fonds commun de placement (FCP). 

The UK tax treatment of a RIF in many respects mirrors that of offshore unit trusts that are commonly used for UK real estate investment, such as a Jersey property unit trust (JPUT). This is by design: Another implicit driver for the RIF is providing an onshore alternative to a JPUT for investment in UK real estate, although the RIF is open to all asset classes.  

3. What Are the Conditions for Becoming a RIF? 

A RIF must: 

• Be an AIF and a CIS (by virtue of being a contractual co-ownership scheme under s235A of the Financial Services and Markets Act 2000)
• Be “UK-based,” which broadly requires a UK operator (the UK AIFM), a UK depositary, and English law constitutional documents 
• Meet either a “genuine diversity of ownership” condition or “non-close” condition, both of which are closely modelled on the UK’s existing “exemption election” regime (part of the UK’s rules on non-resident capital gains taxation on interests in UK real estate) and require (broadly) that the RIF is either widely held or owned by “qualifying investors” (as defined in the exemption election regime, which is also very closely aligned with the UK REIT regime) 
• Meet one of three “restriction requirement” options, as discussed below 

There are three different routes for a RIF to meet the restriction requirement, and it is possible to meet the conditions for two routes at the same time. These routes are largely designed to preserve the UK’s ability to exercise its taxing rights in relation to UK real estate (where applicable). In high-level terms, the three options are: 

1. UK “property rich” RIF: A RIF with, broadly, more than 75% of its gross asset value derived from UK real estate 

2. Exempt investor RIF: A RIF that has an investor base made up solely of investors that are exempt from UK capital gains taxation 

3. No UK real estate RIF: A RIF that holds no direct or indirect interests in UK real estate (or holds only de minimis amounts of such interests) 

4. What Is the UK Tax Treatment of a RIF? 

For UK tax purposes, in high-level terms, a RIF should be treated as follows (some of which  are conditional on continuing to meet the RIF qualifying conditions): 

Capital gains taxation 

From an investor’s perspective, a RIF is in effect opaque but exempt for UK capital gains purposes. (Technically speaking, the RIF is not a taxable person, but it is deemed opaque for UK capital gains taxation purposes for investors.) 

In other words, unlike the position for a limited partnership, investors in a RIF are not liable to UK taxes on capital gains when the RIF disposes of its underlying assets (on a look-through basis); investors are instead liable to UK capital gains taxation only on a disposal (or deemed disposal) of a unit  in the RIF. Generally, this means non-UK resident investors will be subject to UK capital gains taxation only where the RIF is UK property rich.

But consider the following: 

• In practice, repatriation of capital gains to investors will generally be in a form that triggers a (part) disposal of investors’ interests in the RIF, and any UK capital gains tax liabilities would be triggered at that point. 
• Non-UK resident investors in a RIF that is UK property rich will be liable to UK tax (and UK tax filing obligations) on gains on disposals or deemed disposals of units in a RIF, subject to any UK tax exemption and/or tax treaty protection that the investors may have. 
• If a RIF ceases to meet the qualifying conditions, it can (subject to certain saving provisions) become treated as a partnership (i.e., transparent) for UK capital gains taxation purposes, meaning that its investors would be liable to UK tax on a look-through basis on their share of underlying gains arising to the RIF. 

Income taxation 

A RIF is transparent for UK income taxation purposes. In other words, income arising to a RIF is treated as arising to the RIF’s investors regardless of whether it is distributed or reinvested, and it is liable to UK income taxation in the hands of the RIF’s investors accordingly.  

However, the operator of the RIF can elect to compute capital allowances (a type of tax relief available for eligible capital expenditure) at the level of a RIF to simplify administration for investors. 

Value-added tax (VAT) 

There is no specific exemption for management of a RIF, so UK VAT will be chargeable on management fees incurred by a RIF.  

As with any other VAT incurred by a RIF, VAT on management fees will be recoverable only to the extent that the RIF is making taxable supplies. This may mean there is irrecoverable VAT for some investment strategies (e.g., residential property). 

Stamp Duty and Stamp Duty Reserve Tax (SDRT) 

There is no UK stamp duty or SDRT on transfers of units in a RIF. 

Acquisitions of shares and securities by a RIF are, where applicable, subject to UK stamp duty and SDRT in the usual way. However, it is possible to transfer shares and securities to a RIF in exchange for units in the RIF without UK stamp duty or SDRT, provided certain conditions are met. 

Stamp Duty Land Tax (SDLT) 

A RIF is opaque for SDLT purposes: There is no SDLT on transfers of units in a RIF, and the RIF itself, rather than its investors, pays SDLT on any acquisitions of English (or Northern Irish) property by the RIF. 

But consider the following: 

• If a RIF ceases to meet the qualifying conditions, unless certain saving provisions apply, the vehicle will cease to be SDLT-opaque. At that point, investors in the RIF will be treated as acquiring an interest in the RIF’s underlying properties and will be subject to SDLT on that deemed acquisition. 
• SDLT seeding relief may be available on transfers of property to a RIF in exchange for units in the RIF, subject to meeting qualifying conditions and subject to clawback rules. 

Scottish Land and Building Transaction Tax (LBTT) and Welsh Land Transaction Tax (LTT) 

It is hoped that for the equivalent Scottish and Welsh taxes (LBTT and LTT, respectively), there will be rules introduced to mirror the SDLT treatment of a RIF. However, because those are devolved taxes, creating equivalent rules will require legislation from the Scottish Parliament and the Welsh Assembly. 

Tax status of RIF in other UK tax regimes 

The RIF has beneficial tax status for certain UK tax regimes: 

• “Institutional investor” and “Qualifying investor” status: RIFs have been added to the list of institutional investors that are “good” investors for the purposes of the UK real estate investment trust rules. By extension, this also means that a RIF is a qualifying investor for the UK’s “exemption election” regime.  
• Exemption election: It is possible for a RIF that is UK property rich to make an exemption election, subject to meeting the relevant conditions. We would generally expect this to be valuable only where the RIF has subsidiaries that are not transparent for the purposes of UK capital gains taxation. 
• Qualifying institutional investor (QII) substantial shareholding exemption (SSE): The legislation for QII SSE (a regime that can exempt companies owned, directly or indirectly, by QII investors from UK capital gains tax on certain disposals of shares, also relevant in the context of the UK’s rules on non-resident capital gains tax on interests in UK real estate) has been amended so that: 
  • A RIF can be traced through for QII SSE purposes to identify any investors in the RIF that are QIIs.
  • When all a RIF’s investors are exempt from UK capital gains taxation, the RIF qualifies as a QII in its own right (i.e., similar to an exempt unauthorised unit trust (EUUT)). 

RIF tax regime: Other points of note 

• The RIF regime includes specific (often detailed) compliance and reporting rules. This includes the ability to “cure” certain breaches of qualifying conditions. 
• The RIF rules also provide for the establishment of umbrella RIF arrangements. 
• It is possible a RIF could be used as part of a wider fund structure, with the ability to meet certain of the qualifying conditions on a fund as a whole basis via the “multi-vehicle arrangements” rules. 
• A RIF that qualifies as either an “exempt investor RIF” or a “No UK real estate RIF” (using the definitions above) can convert to an LTAF that is an authorised contractual scheme (ACS).  

5. When Is a RIF Expected to Be Most Attractive?

There are various potential uses for a RIF, but much of the focus has been on seeing a RIF as a vehicle for investment in UK real estate and/or where there is a strong desire for a fully onshore fund structure. 

The attractiveness of a RIF relative to other options will vary between investment strategies and investor bases. In particular, we expect the factors driving the attractiveness of a RIF for investment in asset classes other than UK real estate (e.g., private equity, private credit, solely non-UK real estate, etc.) will be notably different from those for investment in UK real estate. 

This is primarily because many of the UK tax features of a RIF are either specific to, or more relevant to, UK real estate investment, which means that there are simply more factors to consider when choosing a RIF for UK real estate investment. 

Non-UK real estate investment 

In the context of investment strategies that do not include UK real estate, in our view, the paramount attraction of a RIF is the ability to have a fully UK fund structure. For example the UK qualified asset holding company (QAHC) regime could also be used if one or more UK holding companies is required. An obvious alternative fund vehicle in that context would be an English limited partnership (ELP).  

One key UK tax difference between a RIF and an ELP is that an ELP is transparent for both income and gains, whereas a RIF is transparent for income only (provided it continues to meet the qualifying conditions). There are other legal and tax differences between a RIF and an ELP that would also require consideration when comparing the two in this context.  

Overall, we expect that for investment strategies other than UK real estate investment, a RIF may be appealing to certain UK taxable and tax-exempt investors and certain non-UK investors with a UK tax exemption, especially those with a strong preference for a fully onshore structure. 

UK real estate investment 

A RIF is expected to be most relevant in UK real estate where a significant proportion of investors are exempt from UK income taxation on UK property rental business profits (e.g., UK pension schemes, sovereigns, etc.). This is because the UK income taxation transparency of RIFs allows investors to benefit from their exemption without creating SDLT on transfers of interests in the vehicle (as would be the case if a limited partnership were used instead of a RIF).  

By contrast, a RIF could be unattractive to non-UK resident investors because they would become subject to UK tax payment and filing obligations in respect of on any property rental business income (and any trading and/or other income) arising to the RIF, owning to the income tax transparency of the RIF. 

That combination of UK tax features has meant that the RIF has often been informally referred to as an “onshore JPUT” due to the similarity in treatment for many UK tax purposes. In our view, that serves a reasonable guide for situations in which a RIF may be attractive to investors in a UK real estate context — generally, the same categories of investor that have historically been interested in JPUTs. (However, in our experience, recent changes in law mean that a number of major investors falling into this category now prefer UK REITs where viable.)  

One possible advantage of a RIF over a JPUT is the potential for SDLT seeding relief on transfer of a property to the RIF in exchange for units, which could be very valuable in certain cases.  

On the other hand, unlike a JPUT, many elements of the RIF’s UK tax treatment (in particular, opacity for UK capital gains taxation and SDLT purposes) are conditional on the RIF continuing to meet the qualifying conditions.  

We do not expect the RIF’s effective exemption from UK capital gains taxation to be a material factor in the context of UK real estate because investors in a UK property-rich RIF will be within the charge to UK capital gains tax on disposals and deemed disposals of an interest in such a RIF. This is by design, to ensure that the RIF not being chargeable to UK capital gains taxation does not create a tax advantage for non-UK residents that would otherwise be taxed on gains derived from UK real estate. In essence, UK capital gains taxation is effectively deferred and pushed up to the level of investors in the RIF. 

In summary, we expect that a RIF will be most in demand when the investor base wants a structure that is UK income taxation transparent and there is a strong preference for an onshore structure. For example, we understand there has been a lot of early interest in RIFs from UK local government pension schemes. Also, certain non-UK investors may have internal tax policy or reporting requirements that mean they prefer a UK, rather than Jersey, vehicle. 

Another aspect to factor in will be the investment strategy — in particular, whether it includes investments that will involve VAT-exempt supplies. This is because the lack of VAT exemption for RIF management may create irrecoverable VAT leakage for certain investment strategies, such as residential, where the underlying property supplies are VAT-exempt. However, the cost of any VAT leakage is just part of the holistic assessment of overall costs and could be outweighed by other cost and nonfinancial benefits of a RIF, compared to other options. 

In that regard, and more generally when comparing to other vehicles, it is notable that the RIF offers cost efficiencies and potentially greater flexibility (especially when compared to the UK’s existing ACS regime) and can be launched with a small UK AIFM for either closed-ended or hybrid (with soft redemption rights) strategies. 

Investment strategy may also be relevant for other reasons. For example: 

• Where there is a risk of trading income, UK tax exempt investors might still prefer a EUUT. However, where that is less of a concern, the anticipated lower operational costs of a RIF compared to a EUUT may be compelling. 
• Further clarity and (hopefully) potential changes to the treatment of a RIF for Scottish LBTT and Welsh LTT purposes are awaited. In the short term, this may mean that RIFs are not used where Scottish and Welsh real estate investments are envisaged until the position is legally clarified. 
• Certain non-UK investors with full exemption from UK direct taxation may now prefer UK REITs to a JPUT. However, a UK REIT is not always viable for all investment strategies and, where that is the case, some may now prefer an “onshore” structure (e.g., a RIF) to a JPUT. 

Overall, in a UK real estate context, we expect a RIF to be most attractive for investment in commercial real estate where the investor base is predominantly UK investors and/or those preferring an onshore fund structure. 

6. Final Thoughts

The RIF is a valuable addition to the UK funds regime and one that will merit close consideration for certain investor bases and strategies.  

The RIF is expected to be of particular interest when the fund anticipates an investor base that is UK-based or has a strong preference for a UK onshore structure. The RIF is also expected to be particularly appealing for investment in UK commercial real estate. 

 

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^[1] An LTAF is an FCA-authorised open-ended fund vehicle. See our recent client alert for background.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.