Authorised property investment funds took a step closer to achieving the same tax-free status as REITs yesterday.

The Treasury issued a consultation paper on new regulations that would encourage investors to put their money in authorised property funds.

Open-ended investment companies would be permitted to convert to authorised investment funds, and would be exempt from corporation tax. This would make them more attractive to investors, especially retail investors investing via pension schemes or ISAs, who had previously been paying tax twice, at the fund and the personnal level, if they wished to invest in these companies.

The move will remove the tax distortion between these funds and REITs, and it is hoped it will encourage greater investment in authorised property funds.

The draft regulations state that to convert, funds must meet many of the same conditions as REITs, such as not paying more than 10% of its dividend to a single shareholder. They must also hold more than 60% of their assets in direct property or REIT shares.

Melville Rodrigues, partner at Mayer, Brown, Rowe & Maw, said: ‘The discussion paper is very welcomed. Hopefully there will be a successful resolution of a few outstanding issues, with the result that there will be a new tax regime for property AIFs by April 2008.

‘I am delighted that the new regime is not restricted to retail funds: qualified investor scheme funds should be able to benefit from this regime.’