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Limited partnerships are transparent for SDLT purposes. As such any transfer of a partnership interest will trigger an SDLT charge on the proportionate share of the underlying assets. This makes them unsuitable for open-ended funds or funds in which there is anticipated to be any secondary trading of the units. Secondary trading in fund units is an increasingly important element of CIVs for institutional investors and reduces the need for liquidity in the fund for open ended redemptions. This has been a key element in the development of funds since the 2008 crisis and was one of the factors that ensured that in 2016 institutional funds did not face the same volatility as funds for retail investors. It would be extremely unfortunate to reverse this trend.
Exempt Unauthorised Unit Trusts
These are only open to tax exempt investors. UK defined benefit pension schemes are in long term decline and therefore a key attraction of investing in CIVs is the ability to pool with other investors to achieve scale. Key investor groups that cannot invest in EUUTs are non-exempt overseas investors and UK life assurance companies. EUUTs may be a suitable route for some funds currently resident offshore, but the SDLT cost of
transferring the assets makes this unattractive. A seeding relief comparable to that for COACS and PAIFs would assist those managers for whom this is a potential solution, but is not a panacea for all the challenges. Seeding relief would assist in dealing with SDLT, but would require separate changes in Scotland (now under consideration) for LBTT and from April 2018, LTT in Wales.
UK authorised funds (PAIFs and CoACSs)
The regulatory constraints of UK authorised funds make them unattractive to many institutional investors. In particular the funds need to be open-ended.
Following the 2008 crisis many institutional investors wanted the liquidity of funds restricted to reduce volatility.
Real Estate Investment Trusts
Many investors do not want the price volatility of a listed vehicle. The absence of seeding relief makes the cost of conversion to a REIT punitive.
What needs to be done?
We believe consideration should be given to:
a) changes to existing regulation to make current vehicles more flexible; and / or
b) creation of a new type of UK vehicle that does not need to be open-ended or listed; and
c) seeding relief to allow existing assets to be transferred into a vehicle under a) or b) above.
This blog has discussed a variety of issues and developments regarding investment by open-ended and semi open-ended funds in illiquid assets. There are a number of areas that we will be focussing on over the rest of the year:
a) At the IPF 30th Anniversay Symposium in London on 16th May 2018 John and Rob Martin, Director of Research at LGIM Real Assets, addressed the session "Illiquid assets in a world of electronic trading and platforms". You can read an article about it here. John will be producing further material on this topic over the next few months.