REIT Real Estate Investment Trusts - your comprehensive UK guide

What are Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are tax efficient investment vehicles that invest in commercial and residential properties. They were introduced to the UK in January 2007 and are common in other countries, particularly the USA and Australia. They were sancitioned by Gordon Brown in his pre-budget statement in December 2005.

Real Estate Investment Trusts pay no Corporation Tax if they distribute 95% of net profits to investors. Three quarters of income must come from property rents but the remaining 25% can come from development and services. Most property companies are expected to convert to REIT status and it is expected that the government will allow REITs in savings products such as individual savings accounts (ISAs) and child trust funds. Although single property REITs would not be allowed, shopping centres, with multiple tenants, could be REITs.

A company wishing to become a REIT may do so but must meet certain criteria:

• It must not be an Open Ended Investment Company (OEIC).
• It must be publicly listed on a Recognised Stock Exchange.
• It must be tax resident in the UK
• It may not be dual resident in any other jurisdiction.

The company must have only one class of ordinary shares in issue and have no other classes of shares. Further ciriteria:

• The company must have at least three properties in it’s portfolio throughout all accounting periods.
• No individual or corporate body shall own more than 10% of the shares in the company.
• The value of a single property must not exceed 40% of the combined value of all of the property business.
• Within 6 months of the end of it’s accounting period the UK REIT must distribute 95% of the profits of the tax exempt business

Tax Treatment of REITS

So long as at least 75% of the company’s activity relates to the ring fenced property letting business both in terms of income and assets (rather than services provided to that business) it will benefit from favourable tax treatment. That is an exemption from Corporation Tax on both profits and capital gains the result of which should be strong dividends to shareholders. In terms of distributing it’s income the company is required to withhold basic rate tax on the distribution. As with distributions from shares generally, investors will not receive a tax credit in respect of this.

Tax Treatment for Shareholders

The principle behind UK REITS is to create a position whereby investors can invest in a portfolio of properties as is they owned them directly. Thus UK REITS will effectively be a “pass through” organisation, the effect of which is to transfer the income and gains of the business through the company exempt of tax to investors who will then assume the tax liabilities.

Tax Exemptions for Individual Investors

Shares in UK REITS are eligible to be held in Individual Savings Accounts (ISAs), Personal Equity Plans (PEPs) and Self-Invested Personal Pension Plans (SIPPs) subject to the existing limits and rules. This would exempt all income and gains from tax making such investments highly attractive.