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REITs: Faculty says objectives are unclear

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6th Jun 2005
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The Government's policy objectives surrounding the creation of a UK Real Estate Investment Trust are "not entirely consistent", the ICAEW's Tax Faculty has declared.

It was responding to UK Real Estate Investment Trusts: a discussion paper, published alongside the March 2005 Budget.

The Treasury said that subject to finding a workable solution meeting 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. The Government said it was "committed in principle" to reforming the taxation of property investment.

The stated policy objectives were:

1. Improving the quality and quantity of finance for investment in commercial and residential property;
2. Expanding access to a wider range of savings products on a stable and well regulated basis;
3. Protecting all taxpayers by ensuring a fair level of tax is paid by the property sector; and
4. Supporting structural change in property markets to reduce costs and improve flexibility and quality for tenants.

Property industry perspective
The faculty said in TAXREP 25/05 that it thinks the second and third objectives are the most important, but "the property sector seems to rate the first objective as being more important".

It added: "The property industry professional press seems to suggest that many in the property industry regard UK-REITs as a tax efficient means of attracting overseas investors to the UK property market. This seems consistent with the first policy ' We ourselves had understood that UK-REITs would serve primarily as a means of promoting long term savings for UK based individual investors."

It said there seems to be some conflict between objectives one and three, and called on the Government to "spell out its real objectives".

The current discussion paper has "dropped the reference to individual investors", the faculty said, although a 2004 consultation paper had envisaged promotion of long term savings by individuals.

The faculty based its detailed comments on the assumption that "the objective is to promote long term savings by UK resident individual investors".

Neutrality
It said: "If the third objective of ensuring a fair level of taxation is an important objective as far as the Government is concerned we believe that there ought to be neutrality between UK resident and non-UK resident investors as far as taxation of income is concerned.

"The current position is that non-UK resident individuals who invest in UK property pay tax on rental income but do not pay tax on capital gains.

"The property industry view seems to be that it believes that it does not matter unduly whether resident and non resident individuals pay the same tax on income, as overseas investors should stimulate the market, hopefully to such an extent that the additional tax paid by all residents will outweigh the loss of tax from non residents. We have no view on that underlying economic concept. We believe that it is for the Government to decide what it wishes to achieve."

Andrew Goodall
Editor, TaxZone

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