Increase your property returns with a Paif

However, in 2008 a new structure was introduced, Property Authorised Investment Funds (Paif), which distribute their income gross. This means investors should be able to benefit from holding the fund in a tax wrapper such as a Sipp or Isa and get higher returns.

"There are very strong and clear benefits for tax exempt investors," adds Barry MacClennan, investment director at Standard Life Investments.

Not many funds converted to this immediately but in 2010 the Royal London Property Fund (GB00B65M0K29), which is aimed at institutions, converted to a Paif structure. Since then a number of funds available to private investors have converted to Paifs, including IC Top 100 Fund M&G Property Portfolio (GB00B8G9TT83) in January 2013.

M&G says that as an example of the tax benefits of investing in a Paif, a £10,000 investment with an annual income yield of 5 per cent would give an Isa investor the following:

via a Paif = £500

via an authorised property unit trust = £400

Therefore, the Isa investor would be 25 per cent better off if investing via a Paif than in a UK property unit trust.

Other converts include the Ignis UK Property Fund (GB00BJZ2V336), which attained Paif status last month. "This will result in a significant uplift of up to 25 per cent in income returns for eligible investors," comments the company.

Funds with a Paif structure

Source: Investment Management Association, Investors Chronicle

However, not many fund platforms can host Paifs because platforms can't distinguish between exempt and non exempt investors – those which should get paid the income gross, for example Sipps and Isas, and those who should get it net of tax – those outside of these wrappers.

Paifs also have a more complicated income structure because they distribute three streams: rental, dividend and interest, another feature which makes them difficult for platforms to accomodate.

One major platform which does not offer Paifs is Cofunds – which not only serves the customers of independent financial advisers but also provides funds for discount brokers such as Chelsea Financial Services.

A number of platforms offer what is known as a feeder fund, which has a conventional structure such as a unit trust and invests in the Paif. However, investors in the feeder fund do not get the tax benefits of a Paif.

"The bad thing is, investors might think they are investing in a Paif with all the benefits, but are not being told that the feeder fund doesn't have them," says Darius McDermott, managing director at discount stock broker Chelsea Financial Services.

One of the reasons platforms have not prioritised the ability to hold Paifs is because over the last two years they have focused on implementing necessary changes following the Retail Distribution Review (RDR), which prevents fund providers paying commission to intermediaries.

Read more on RDR

Since April this year fund platforms have no longer been able to take commission from fund providers on new business and have been busy introducing so called clean share classes which do not incorporate commission.

"It is disappointing because holding the Paif share class can greatly increase the yield," says Mr McDermott. "It could mean investors being able to get a yield of more than 4 per cent. Feeder funds don't enjoy that benefit."

Platforms which host PAIFs

But there are a number of platforms that do host Paifs. These include the following, but this is by no means an exhaustive list so if you are looking to invest in a Paif and don't use one of these, check with your platform to see if they offer them.

Platforms which can host Paifs

"The ability of our structure to stream three different income types (property income, interest and UK dividends) allows our Isa and Sipp clients to benefit from an additional 20 per cent income uplift in many cases," says Alliance Trust Savings. "We currently offer a handful of Paifs on the platform including Kames Property Income Fund (GB00BK6MJC43) and L&G UK Property (GB00BK35DT11). We expect further conversions into Paifs in future as platforms develop operational capability in this area."

These include Standard Life Investments which hopes to introduce the ability to hold Paifs in its wrap by around the end of this year, while Cofunds is believed to be planning to build in the ability to host Paifs.

Platforms may look at options such as buying funds in aggregate as if all the investors should receive the distributions gross of tax, and then pay what is owed to HM Revenue & Customs.

Platform or Paif?

If your platform doesn't offer the Paif version of a property fund you could try and buy it directly from the fund provider, but some charge more for you to do this than if you go to a platform or discount broker. For example, as a private investor going direct to a provider you may have to buy retail share classes which can cost more than the institutional share classes platforms often hold. So advisers generally suggest you don't do that.

"Going off platform to invest directly in a Paif which is not available on a particular platform is rarely a good solution due to the additional charges and complexity of managing your portfolio when it is held in separate places," says Martin Bamford, managing director of chartered financial planner Informed Choice. "For example, regularly rebalancing a portfolio where one fund is held separately would be very difficult to do in a timely and cost efficient manner."

"If all your investments are on a platform it is unlikely you would go off platform unless that extra income is very important," adds Mr McDermott. "A balanced portfolio might have 5 to 10 per cent in property but if you have a greater allocation meaning that income accounts for more, then it will be more significant. Whether you should go for a Paif structure off platform depends on how important income generation is and how much you have in property. Most investors would probably stay on platform."

Mike Horseman, managing director at independent financial adviser Cockburn Lucas, points out the convenience of buying as many funds as you can via a platform allowing you to consolidate your holdings.

"In the main, we would expect the benefits of remaining invested via a platform or administrator, and therefore via a feeder fund, to outweigh any anticipated marginal tax benefit of taking monies off platform and investing directly into a Paif," adds Patrick Connolly, certified financial planner at Chase de Vere.

Paifs

Rob Pemberton, investment director at HFM Columbus Asset Management, likes IC Top 100 Fund M&G Property Portfolio. The M&G Property Portfolio Paif A share (GB00B8G9TT83) offers a yield of 3.51 per cent, while the feeder fund (GB00B8FWH509) has a lower yield of 3.44 per cent, according to Morningstar data.

The Paif share classes are available on the following platforms: Hargreaves Lansdown, Alliance Trust Savings, AJ Bell, Transact, Pershings, Ascentric and Hub Wise.

Source: Morningstar, *M&G.

Morningstar as at 23 June 2014

Top ten holdings as at 31 May 2014

Sector breakdown net of cash and near cash

"Our preferred property fund, which recently underwent a conversion to a Paif, is Ignis UK Property (GB00BJZ2V336)," says Mr Bamford. "This fund is managed by an experienced and well resourced real estate team."

This fund's Paif share classes are available on the following platforms: Hargreaves Lansdown, Transact, Ascentric and Pershing.

L&G UK Property Fund is the most recent convert to Paif status. It aims for an attractive income yield and capital growth, and its Paif share classes are available on platforms including Hargreaves Lansdown and Alliance Trust Savings.