Reserved Investor Fund Consultation

As part of its ongoing review of the UK funds regime, HM Treasury published on 27 April 2023 a consultation on the potential introduction, scope and design of a tax regime for a new unauthorised contractual scheme fund structure referred to as the Reserved Investor Fund (Contractual Scheme) (RIF) (the Consultation).

Read the consultation here.

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The deadline for the Consultation is 9 June 2023 at 11:59 pm and responses to questions should be submitted electronically to UKfundsreview@hmtreasury.gov.uk.The Consultation follows on from feedback provided by various industry stakeholders that there is a gap in the UK's unauthorised fund range for a new, flexible, tax-efficient, fund structure that would be used for products aimed at professional and institutional investors (i.e. not the broader retail investment market) and investing in alternative asset classes and investment strategies.

Representations from the industry suggested that the new contractual scheme fund should be unauthorised and open to all asset classes, although it was expected to be particularly attractive to commercial real estate investors.

The government believes that there is no need to alter the current regulatory framework to establish the RIF. In the Consultation the government:

1. outlines its stance on how these schemes should be regulated;
2. suggests limiting the issuance of units in the scheme to certain professional and institutional investors; and
3. proposes the introduction of a specific tax regime for RIFs that largely replicates that which applies to Co-ownership Authorised Contractual Schemes (CoACS), including simplified capital gains tax rules.

The government has also invited views on the use of the term “RIF”. The government considers that this most accurately describes the target investors, avoids reference to “unauthorised” or “unregulated” (as this can cause confusion for investors as the fund manager must still be authorised or registered) and describes the fund's legal form. 

Proposed Legal Form, Regulatory Treatment and Specific Tax Regime for RIFs

Regulatory framework

The government does not intend to insert a definition of a RIF into the Financial Services and Markets Act 2000 (FSMA) and believes that an unauthorised contractual scheme could be established within the existing regulatory framework. The government intends to include eligibility criteria for a RIF in primary tax legislation.

Whilst FSMA is silent on the definition of an unauthorised contractual scheme, the government does not consider that the legislation prohibits such schemes because they are “contractual schemes” as defined by FSMA. This means that funds established as RIFs will not require authorisation by the Financial Conduct Authority (FCA).

As a contract scheme that is not authorised by the FCA, a RIF would be an unregulated collective investment scheme (UCIS) and an alternative investment fund (AIF). Under the UK’s regulatory regime, the manager of an AIF – in this instance a RIF – must be either authorised by the FCA as a full-scope UK AIF manager, a small authorised UK AIF manager, or registered with the FCA as a small registered UK AIF manager.As the RIF would be an unauthorised AIF, there are no direct regulatory limits on the assets or investment strategies that could be pursued by a RIF.

In terms of structure, the RIF would be available as either a closed-ended or hybrid investment fund structure. The government also anticipates that RIFs could be set up as umbrella funds.

Restrictions on issuance of units in RIFs to certain categories of investor

The government proposes in the Consultation that certain sections of FSMA (which currently applies to authorised contractual schemes) should be extended to apply to RIFs if they are introduced. This would mean that a RIF's units may only be issued to:

1. professional investors;
2. investors who buy units in exchange for a minimum payment of (or property worth) £1 million; or
3. existing investors in the RIF.

Financial promotions

The Consultation notes that as a UCIS, the RIF would be subject to the FCA’s marketing rules for Non-Mass Market Investments such that mass marketing to retail investors is not permitted.

However, marketing to professional investors and other investor categories (such as certified high net worth investors, certified sophisticated investors and self-certified sophisticated investors) is allowed.

Rights and liabilities of participants 

The Consultation highlights that the government amendment to the Financial Services and Markets Bill 2022-23 to introduce a new section 261Z6 into FSMA will, if enacted, enable the government to make regulations concerning the rights and liabilities of participants in unauthorised co-ownership schemes (such as a RIF).In particular, the liability of investors may be limited to the property held by the fund and their period as an investor, and liabilities of investors in sub-funds may be segregated.

Proposed design of a new tax regime for RIFs

The proposed tax regime for RIFs is intended by HMRC to closely resemble the tax rules applied to CoACS. The Consultation sets out how the government aims to achieve tax neutrality and provide investors with clarity regarding their tax treatment through investing in RIFs.

Summary

In summary, the Consultation seeks views on the following areas:

• whether the government should introduce the RIF, and if so whether it should introduce the unrestricted RIF or a restricted RIF (particularly inviting views on restrictions to the investment strategy and/or eligible investors);
• the eligibility and notification criteria;
• the branding of the RIF;
• the proposed design of a new tax regime for a RIF;
• the application of the non-resident capital gains rules to a RIF; and
• the treatment of unauthorised co-ownership contractual schemes that would not fall within the RIF regime.

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