Pensions Corporate Streaming and PAIFs

This is a follow up on the posts of 11th July and 20th June on HMRC's proposals to abolish corporate streaming.

The issue here is that pension investments should not be subject to UK tax but if a pension fund or pension scheme uses an authorized investment fund (AIF) as an investment vehicle then there can be tax leakage as the AIF is liable to corporation tax and there is no mechanism for say a trust based SIPP or a pension scheme to obtain a refund of the tax deducted.  A similar analysis applies for ISAs.

It's important to note that although this tax leakage is inappropriate its not particularly widespread.  This is because if the AIF is a bond fund it will probably pay a tax deductible interest distribution.  If the AIF invests in equities (either UK or foreign) then the dividends will be exempt from tax.  Where tax leakage can be an issue is in certain balanced funds and property AIFs that are not Property Authorized Investment Funds (PAIFs) .

Currently pension investments of life assurance companies do not suffer tax leakage when they invest in a property AIF that is not a PAIF due to the corporate streaming rules.  A quick numerical example (ignoring expenses).

Property income in AIF = 100.  Therefore tax in AIF = 20 and amount available for distribution is 80.  When the distribution is received by a life insurance company it will come with a notional amount of income tax that can be offset against the insurance company's corporation tax liabilities or repaid.  So the effective income in the life company is 80  +  20 =  100.  As this is referable to pension business it is not subject to a tax charge in the life company and the tax leakage suffered by a  SIPP etc is avoided.  

But if HMRC's proposals to abolish corporate streaming are adopted then  tax leakage will  apply to pension business investments of life insurance companies as well as other pension arrangements.

The answer to all these tax leakage issues would seem to be invest in a PAIF.  I don't intend to go into a full description of the taxation of PAIFs (not my specialist area so treat my comments with a degree of caution) but the key points would seem to be

The property income of the PAIF is not subject to tax (see here si 2006/964 regulation 69 (Y1)).

Although there is a general requirement to deduct tax from PAIF dividends this does not apply where the dividend is paid to inter alia a UK company, a pension scheme or an ISA. (see here si 2006/2867 regulation 7  - this is the REIT statutory instrument but looks as if also applies to PAIFs).

The problem to date has been that there are few PAIFs available for investors.  Royal London has had a PAIF since 2010 but the only other PAIF I am aware of is an M&G fund.  However, it seems as if other investment managers are catching up, searching the internet there are references to Standard Life, L&G, Ignis and Aviva all intending to convert to PAIF status.  What I haven't been able to find is a central list of funds with PAIF status.  If anyone is aware of such a list perhaps they could let me know.