Save content
Have you found this content useful? Use the button above to save it to your profile.

PBR: Real Estate Investment Trusts (UK-REITS). By Nichola Ross Martin

6th Dec 2006
Save content
Have you found this content useful? Use the button above to save it to your profile.

The chancellor announced that the conditions to be met when giving notice and on joining the regime will be relaxed, to make it easier for newly-established companies to become Real Estate Investment Trusts (UK-REITs). Other changes will be made to respond to problems that have been identified as companies and HMRC have been working towards implementing the regime.

The company (principal company of a group) will no longer need to have its shares listed on a recognised stock exchange on the date they give notice. Instead the company must affirm that it reasonably believes it will meet that condition on the day they actually join the regime, and must meet that condition continuously thereafter to remain in the regime.

Where newly-established companies breach the 75% asset test on the first day in the regime, an additional amount of tax will be charged for that accounting period that equates to 2 per cent of the excess of the market value of investment property at the end of the first accounting period over its market value at the start. If the 75 per cent asset test is not met at the end of the first accounting period, the company or group will be treated as though it never had been in the regime.

The other proposed revisions fall into three broad areas:

1. Definition of various terms used in the UK-REIT legislation, including
− ‘owner-occupied’ for the purposes of tax-exempt income and excluded income,
− ‘profits’ and ‘financing costs’ as used in the interest cover test, measure of profits of the tax-exempt business and the Balance of Business Conditions, and
− ‘profit-linked loans’ that are prohibited.

2. Extension of the UK-REIT take-over rules to de-mergers.

3, Ensuring charities are exempt from tax on distributions from UK-REITs in the same circumstances that are exempt from tax on UK dividends.

UK-REITs - at a glance
UK-REITs are bespoke property vehicles which are designed to give investors flexibility in property investment.

The rules for the UK-REIT regime are contained in Part 4 of Finance Act 2006, and HMRC published guidance on them on 1st November 2006.

Before giving notice to join the REIT regime, the company itself must meet three conditions, and once in the regime, the company must meet three further conditions throughout every accounting period that it is in the regime. They are set out in section 106 FA 2006 (subject to the above amendments).

The conditions for giving notice to join the regime are:
1. that the company is UK resident,
2. it must not be an open-ended investment company, and
3. its shares must be listed on a recognised stock exchange (see above).

The further conditions for remaining in the regime are:
- It must not be ‘close’ (controlled by five or fewer shareholders), but there is an exemption if at least 35% of the shares are held b the public – which can include certain pension fund schemes.
-The only shares it can have in issue are a single class of ordinary share capital and non-voting fixed rate preference shares, and
- it must not be party to any non-commercial loans, i.e. where the results are dependent on the profits of the business. There is a tax charge if its ratio of profits to financing costs falls below 1.25 (the interest cover test).

Qualifying activities
75% or more of the REITs assets must be investment property and 75% of more of its income must be from rentals. The REIT must hold at least 3 properties, and no single property must total more than 40% of its assets. Where a REIT carries on a joint venture via a limited company, the activities of the joint venture company can be taken into account, likewise with a partnership.
Existing companies will be subject to a 2% conversion charge when they join the regime.

UK-REITs are all set to become highly popular amonst a nation of investors who are still completely obsessed with investing in bricks and mortar.

Pre-budget report coverage sponsored by


Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.