HM Treasury consults further on amendments to the CIS border for property transactions

As our February briefing note reported, HM Treasury (HMT) consulted on whether the Schedule to the Collective Investment Schemes Exemption Order (CIS Order) should be amended to clarify its application to certain types of property transaction. HMT is seeking to minimise or avoid:

• Legal uncertainty for participants and potential participants
• Increased legal expenditure in structuring transactions to ensure they benefit from exemptions in the CIS Order
• Risks of legal challenge by a participant or enforcement action by the Financial Services Authority (FSA) if structures were used inadvertently so that they did not benefit from the exemptions.

HMT has published a revised draft for the new paragraph 9 of the CIS Order and "given that the draft has changed substantially" a further consultation is being undertaken. Responses to the further consultation should be received by HMT by 12 September 2007.

Does this affect me?

There is a general prohibition on establishing, operating or winding up a collective investment scheme without prior authorisation from the FSA. The Schedule to the CIS Order lists certain arrangements that are exempt and can therefore be established without FSA authorisation.

Projects involving the sharing between a number of participants of either the ownership or the economic benefits of owning property may have to rely on these exemptions to avoid regulation by the FSA. This feature is common in certain transaction structures where property is pooled or sites are assembled using jigsaw options. The structuring of these sorts of projects and others that have similar features often needs to take account of the specific exemptions in the CIS Order.

Those in the industry familiar with these sorts of projects will be aware that, as HMT says, "…there is significant uncertainty over whether certain types of property transaction fall within the definition of a CIS…". Paragraph 9 of the current Schedule to the CIS Order exempts certain arrangements entered into for commercial purposes related to an existing business. The paragraph might usually be expected to exempt commercial transactions between businesses. However, there is uncertainty as to its application.

HMT's proposals

If implemented in its currently proposed form the new paragraph 9 would:

• Use of special purpose vehicles (SPVs) - clarify that SPVs can be participants of an exempt arrangement even if specially created for the transaction without an existing business.
• Multiple transactions - clarify that organisations can participate in similar arrangements several times without losing the benefit of the exemption.
• Opting in and out - put in place a new regime under which participants in new and existing schemes can elect to opt out of the exemption and for existing exempt arrangements a safe harbour of continued exemption provided all participants are and remain "permitted" ones.

Action to take

Responding to the further consultation - HMT's consultation document is available on it website.

You could respond directly to HMT by 12 September 2007 or feed in your views to us so that we can reflect them along with the views of others.

Reviewing existing arrangements - If you have existing schemes that have been structured by reference to paragraph 9 - particularly those intended to fail to qualify for the existing exemption (eg for tax reasons) you may need to formally elect to maintain CIS status after the new paragraph 9 exemption has been implemented.