When HMRC introduced the reserved investor fund, its goal was to provide a new type of fund structure with greater flexibility and lower costs.

But RIFs have the potential to offer even more than that, said Mark Eade, tax partner at accountancy firm Blick Rothenberg. The structure is already attracting investors with schemes that focus on affordable and social housing, providing a mechanism by which they can tackle the real shortage across the UK.

“Having the ability to structure a fund onshore has got to be a net positive for the UK,” he said. “And because it brings the potential to have a more efficient structure, a fund should ultimately have more cash to invest back into affordable housing, or whatever its focus.”

Eade has been involved in the development of RIFs for several years as part of the tax working group lobbying HMRC to establish the structure. This work included becoming familiar with the intentions around the rules of the scheme, as well as the technical details, he said.

With the first RIFs launching, Bisnow spoke to Eade about who the fund is geared towards and how it could impact the UK housing market.

Bisnow: What exactly is a RIF?

Eade: A RIF is an onshore alternative to what might otherwise be set up offshore in the likes of Jersey, Guernsey or the Isle of Man, for example, in property unit trusts. They are for professional and institutional investors rather than small investors.

So far, interest in RIFs since the scheme launched has been greater than I anticipated.

Bisnow: What was the government hoping to achieve by establishing RIFs?

Eade: The point was to provide a commercially viable onshore structure for the greater good of the UK. There is real potential for RIFs to generate more affordable housing and boost the regeneration of town centres, which we have a massive need for.

It is also designed to boost job creation. If the fund is onshore, then the fund manager and all administration will also sit in the UK. The knock-on effect is that it bolsters the whole sector supporting the RIF.

Part of the discussion with government was to make the scheme as straightforward as possible to introduce, whilst considering the backdrop of general tax governance and risk mitigation.

Bisnow: What sort of investors are interested in RIFs?

Eade: To date, there have been a range of managers and investors interested in a RIF structure. These include government-backed pension schemes, where there can be potential investor restrictions on investing offshore, together with various institutions and businesses.

Overall, a RIF is broadly suitable for relatively niche investor base, covering professional and institutional investors. This generally lends itself towards investors such as pension schemes and insurance companies.

You don’t need to have a focus on affordable housing or a development of societal benefit, but some interest is coming from managers and investors working on such projects.

Bisnow: At what level of investment is a RIF suitable?

Eade: There’s no strict limit, though there can be minimum amounts to consider around investors' commitments and the value of assets if transferring into a scheme, for example, if you're looking for seeding relief. The clients I’m working with are typically looking at a fund size of £200M-£500M.

Bisnow: What does the UK tax position look like for an investor in a RIF?

Eade: From a high-level viewpoint, the UK tax position of a RIF is relatively straightforward. It’s generally seen as transparent for income tax purposes, so rental yields can flow up the structure where investors will be taxed on the income allocations.

In broad terms, a RIF is normally opaque for capital gains tax, insofar that the RIF itself does not pay capital gains tax, and participants are ultimately taxed on the disposal of their units in the RIF.

Bisnow: Are there any other limiting factors or downsides to a RIF?

Eade: As well as being the right type of investor, there are various conditions to meet to be within the RIF regime. It is necessary to carefully consider the conditions against the proposed investor base, business plan and proposed structure.

As part of looking at the viability of the business and structure, it’s important to fully understand the cost versus benefits of using a RIF, and ultimately to look at the return on investment for potential investors. A RIF may not be the right structure for all proposed schemes.

For example, two different investors into the same asset class may end up looking for a different type of return, which may lead to different outcomes and structure preferences. I’m assisting a client with a feasibility study on a RIF compared to other potential structures. 

I would expect any feasibility study to include a financial model so it’s clear when income will be generated, against expected costs of running the structure, especially in terms of cash flows, and ultimately modelling the expected return on investment. I would also expect tax considerations to be overlaid.

Bisnow: Where do the opportunities lie for RIFs?

Eade: It’s still early days, but once the RIF structure is proven among the early adopters, and returns are starting to flow up to investors, I expect to see more interest in RIF structures, potentially with other types of investors coming in, driving the UK real estate sector forward.

Over time, and whilst a RIF won't be right for every structure, I’m sure the scheme will become more popular and attract a more diversified investor base.

Bisnow: How long might it be before the scheme is proven a success?

Eade: The proof will be in the pudding, as they say. Though given the potential long-term nature of the RIF and schemes that will use them, I expect there could be a delay showing success — ultimately, the income stream and any capital growth will take time. 

However, given sites can be brought into the scheme at various points subject to meeting conditions, from schemes that are almost operational through to scheme where sites have only just been identified, then the time frame may not be as long as expected in order to prove success.

Ultimately, the proof of success will come when the investments are made, and when construction of affordable housing begins or completes.

This article was produced in collaboration between Blick Rothenberg and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.