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For professional investors only What is a Property Authorised Investment Fund (PAIF)? The Property Authorised Investment Fund (PAIF) structure was established in April 2008 by HM Revenue and Customs (HMRC) in an attempt to create a more flexible and tax-efficient environment for property investors. In particular, HMRC wanted to remove the anomaly in which tax-exempt investors suffered a worse tax position when they invested in property through a collective vehicle. So, by creating a more level playing field, a wider range of investors will now benefit from easier access to a broader spectrum of property investments. The background to PAIFs Before PAIFs were launched, the rental income distributed by regulated property funds, such as Authorised Property Unit Trusts (APUTs), was taxed within the fund itself. This deduction makes these vehicles an inefficient and unattractive option for investors who were entitled to receive income distributions gross of tax, such as ISA investors, SIPPs, pension funds or charities, as they are unable to claim the tax back. PAIFs were introduced as a means of allowing tax-exempt investors more tax efficient access to regulated collective investment in property. What is a PAIF? A Property Authorised Investment Fund (PAIF) is an open-ended investment company (OEIC) offering the potential for tax-efficient property investment. PAIFs are authorised and regulated by the UK Financial Conduct Authority (FCA). How is a PAIF structured? A PAIF is structured as an open-ended investment company (OEIC), with at least 60% of its net asset value and income consisting of assets that are deemed to be 'Property Investment Business' (this reduces to 40% in the first year of the PAIF’s existence). A PAIF pays out three separate types of income for tax purposes: -- property income distributions - these represent income from the sub-fund's Property Investment Business; -- PAIF dividend distributions - these represent any dividends received by the sub-fund; -- PAIF interest distributions - these represent the net amount of any other income received by the sub-fund. Taxation essentials PAIFs shift the focal point for taxation on property investment income and interest away from the fund and toward the investor. This means for tax-exempt investors, all property income and interest is automatically paid gross of tax. Alternatively, the tax-exempt investor can opt to have such income reinvested into the PAIF. For non-exempt investors, the 20% tax on property income and interest is applied as before and paid to HMRC. In terms of the dividend income stream, this is treated as any other dividend, with the tax liability borne by the investor. In addition, eligible investors are exempt for withholding tax on distributions. Why choose a PAIF instead of a real estate investment trust (REIT)? With its open-ended structure, a PAIF has greater flexibility to grow steadily and offer liquidity to investors. This is something that would be difficult to achieve as a small REIT, because a critical mass is needed to ensure adequate liquidity. What’s more, while REITs only have to distribute 90% of their income, all of a PAIF’s property investment has to be distributed. In addition, a REIT, whose shares are openly traded, tends to show a strong correlation with the equity rather than property market on a short-term basis. page 1 of 2 Why do PAIFs sometimes have feeder funds? As the PAIF is structured as an OEIC, the majority of investors can access it directly. However, the PAIF rules state that no single 'corporate investor' may hold more than 10% of the Fund directly (these rules were introduced to avoid foreign companies setting up their own PAIFs and taking advantage of double taxation treaties or UK companies utilising the PAIF regime to pay less tax on their property holdings). To accommodate larger investments, HMRC has endorsed the use of a Unit Trust feeder fund which will invest solely into the PAIF. There are no limits on how much of the feeder funds a 'corporate investor' can hold. This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice. References to tax are based on current regulations which may be subject to change. For clarification please seek advice from your financial or tax adviser. Direct and Indirect Property: Where funds are invested in property or indirectly into property, investors may not be able to switch or cash in their investment when they want because investments in direct property and indirect property in the fund may not always be readily realisable. If this is the case and in accordance with the fund’s prospectus we may defer a request to switch or cash in units. Whilst property valuations are conducted by an independent expert, any such valuation is a matter of the valuer’s opinion. The spread between the price to buy and sell is likely to be wider than for other less specialist funds and may vary. There is no guarantee that investments in property will increase in value or that rental growth will take place. There is a risk that a property held in the Fund’s portfolio could default on its rental payments. There is the possibility that a portion of the portfolio will be held in cash if the supply of new investment opportunities is limited which, if the situation persists, may restrict the performance of the Fund. Funds that invest mainly in one type of asset are more vulnerable to market sentiment. We reserve the right to change the pricing basis of the funds and any change will mean an increase or decrease in the price at which you may deal. Kames Capital Investment Portfolios ICVC is an open-ended investment company with variable capital, incorporated in England under the OEIC Regulations. Kames Capital Unit Trust is an authorised unit trust. Kames Capital ICVC is an open-ended investment company with variable capital, incorporated in Scotland under the OEIC Regulations. This document is accurate at the time of writing but can be subject to change without notification. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority (FCA reference no: 144267). SPR5 17763 04/14 PDF page 2 of 2