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Property experts welcome REITs consultation

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17th Mar 2005
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BudgetProperty tax experts have welcomed the Government's commitment to launch UK Real Estate Investment Trusts or REITs.

The Treasury published UK Real Estate Investment Trusts: a discussion paper and said the Government "is committed in principle to reforming the taxation of property investment".

It added: "The consultation has enabled the Government to better define the key features of a potential UK-REIT model that allows for market flexibility. The paper also raises some challenging issues in designing the tax treatment for a model that meets both the needs of the UK property investment market and the Government's objectives for a UK-REIT.

"The Government will therefore engage in further dialogue with industry representatives. Subject to finding a workable solution that meets the stated objectives, including reform at no overall cost to the Exchequer, the Government aims to legislate for a UK-REIT in Finance Bill 2006."

Grant Thornton said that while the abolition of the Stamp Duty Land Tax disadvantaged areas relief was a disappointment, the property industry "breathed a collective sigh of relief" when it emerged that UK REITs are "almost certain to be available by Summer 2006".

The firm listed the key structural features of the proposed funds:

  • "can invest in any type of property in any location
  • must be focused on traditional property investment activities; profits from the property letting business will be ring-fenced from business activities carried on within a property which will be taxed in the normal way
  • must have a minimum of 75% gross income from property rents and at least 75% of gross assets must be invested in properties generating rental income
  • must distribute a minimum of 95% of income but income will be calculated after interest, certain other expenses and capital allowances
  • will not be required to distribute gains which means they can be reinvested or used to pay down debt
  • will probably be tax exempt but investors will be taxed on distributions as income at their marginal income tax rate '
  • will be required to withhold 22% tax from their income distributions
  • will pay Stamp Duty Land Tax in the normal way on their property transactions whilst investors will pay 0.5 per cent Stamp Duty Reserve Tax on the purchase of shares"

Marion Cane, director of Grant Thornton's London property team, said: "This is good news and more than we were expecting to hear after the omission in the Pre-Budget in December 2004 and this should allow enough time to prepare for a launch in Summer 2006.

"Ominously, there was no mention of the issue of a conversion charge. We expect a charge will be introduced, and the level set will be crucial to driving market demand for UK REITs. Without existing property groups coming on board, the new regime will struggle to achieve critical mass. In addition, a number of other key issues still need to be resolved."

Chiltern's associate director Hira Sharma welcomed the consultation and said the case for a UK REIT "has already been well made by the property industry and it is compelling".

Sharma added: "We consider that a UK REIT, properly structured, would be capable of offering increased liquidity in what is generally regarded as an illiquid market; transparency as regards disclosure of operating performance; tax neutrality at the REIT level; enhanced cash flows and dividend yields; and better access to public markets and capital.

"All of these factors will help in further enhancing the attractiveness and significance of real estate as an asset class. We note that the Government wishes to introduce REIT legislation on the basis that it will not result in any overall additional cost to the Exchequer and hope that this requirement will not result in the development of a REIT regime that proves unduly expensive or burdensome."

Andrew Goodall
Editor, TaxZone

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