L&G UK Property Fund or Feeder Fund?

Sally57

Please can anybody explain the difference between investing in the L&G UK Property Fund compared to the L&G UK Property Feeder Fund?

bowlhead99

The property fund is a PAIF and will produce different types of income compared to a bog standard fund which only holds company shares and bonds.

For example, in a "normal fund" which you might hold, you'll be familiar with interest distributions (basic tax withheld at source), dividend distributions (paid gross, whatever the company wants to pay, you would receive).

A Property Authorised Investment Fund or PAIF can pay normal dividend distributions out of its general operating activities, and also distribute a third stream of income: property income distributions or PID (basically net profits from property rentals business, which the PAIF hasn't had to pay any tax on itself) which they are allowed to distribute gross to qualifying investors.

Some investors like big institutional pension funds do not care about tax anyhow, so they will invest directly in the PAIF. But L&G also create a "Feeder" vehicle to funnel investor money into the PAIF (you invest in the feeder, the feeder invests in the PAIF). The feeder will be set up as a "normal" unit trust fund (like some of the other funds you might have in your portfolio) which will pay tax on its property rental income - which it has received from the PAIF - and then out of its net, after-tax profits, it can pay a dividend to the feeder investors.

This is convenient for some intermediaries and platforms who don't have sophisticated systems to track that third type of income stream being sent out of the PAIF. It also means that as an investor in a feeder your PID tax has already been taken care of - none of the income distributed from the feeder will have the character of "untaxed property income" and need for you to pay 20, 40, 45% tax on it ; instead you receive a normal clean corporate profits dividend from the feeder, and pay maybe a nil or low rate of tax on, within your annual dividend allowance.

If you are investing via an ISA or SIPP, and your fund platform offers it, you will be able to invest directly into the master fund (PAIF) and benefit from gross distributions of property income. This is great. You get all the money as cleanly as possible and avoid any UK taxes on that property income.

If you are not investing through a SIPP or ISA you can invest into the Feeder and have them pay tax on the property income so you don't have to. But obviously in doing that, you have suffered tax cost on property income at feeder level. So an ISA or SIPP investor shouldn't invest through the Feeder if his platform offers the opportunity to invest directly in the main fund.

Some simple platforms that still have systems from the dark ages might not offer the chance to invest directly in the main fund, and only let you use the Feeder vehicle even when you're a SIPP or ISA investor. If so, you should consider the alternative platform providers ( if property income distributions would be a material part of your overall portfolio returns).

Long story short - best to avoid using the Feeder if you're a tax free investor through pension or ISA and the option of going straight into the main fund is available.