Government proposals on the treatment of open-ended property funds in Isas have received a mixed response by fund buyers, with views ranging from “sensible and pragmatic” to questioning whether the measures are appropriate.
On Wednesday, HMRC published a consultation mulling whether to allow existing investments in open-ended property funds to remain within an Isa if Financial Conduct Authority (FCA) proposals on extending the redemption notice period to up to 180 days go ahead.
The consultation is also floating the idea of banning ‘new’ investments in such funds in Isas.
Isa rules state that an investor must be able to access any account investments, or transfer them to another Isa, within 30 days of making a withdrawal or transfer instruction, but the FCA has proposed a notice period of between 90 and 180 days before investments in open-ended property funds can be redeemed.
At the time, the FCA flagged the potential issue the proposed rule change could have on Isa eligibility. It is therefore considering whether such funds could be retained within an Isa, but either:
– No further money could be invested in those property funds within the Isa; or
– Account holders could not invest in any new, different property funds within the Isa (although they could continue to invest in those specific funds that are already in the Isa).
‘A sensible and pragmatic approach’
AJ Bell head of active funds Ryan Hughes said the consultation appears to be a sensible way to avoid creating a cliff-edge scenario where an investor owning one of these funds in an Isa is forced to sell out.
He said: “I continue to be a strong advocate of the FCA’s approach given the mis-match in liquidity within this type of fund and potential solutions to the Isa issue proposed in this consultation are, in my view, a pragmatic step forward to help soften the impact of the 90 to 180-day notice period.”
Advisers and investors will have to adapt and live with it
Fairview Investing director Ben Yearsley thinks the rules should be changed to ensure continuing eligibility for existing property investment in Isas. “What happens to new money is different in my view and shouldn’t necessarily be eligible,” he said.
He added: “I don’t have a view on what the best option is to be honest; it will probably end up being you can’t put any new money in which is fine. You could still invest outside the Isa or in a Sipp if you wanted to.
“Wherever the rules end up, as long as existing Isa money is protected then advisers and clients will have to adapt and live with it.”
Property funds held within Isas are likely to fall sharply
But Quilter Cheviot head of property research Oliver Creasey said while the consultation is “marginally good news” for Isa owners holding property funds as they don’t have to sell their existing investments, it is of limited value and does nothing to help new property fund investors seeking to make use of the tax-efficient vehicle.
“Over time, the amounts held in property funds within Isas is liable to fall sharply,” he added. “Many investors are likely to be put off by the FCA notice period, and even if they are not forced to sell out of the funds, we believe they are likely to choose to do so.
“Issues such as this make us question whether the FCA proposals are appropriate.”
Creasey said the best approach is to educate investors about the liquidity risk and recognise that money may not always be immediately available.
It comes as a total of £5.2bn worth of UK direct property funds remain suspended with no date set for when they will reopen despite the lifting of valuation uncertainty clauses that came into effect amid the first wave of the coronavirus pandemic.
