The Reit stuff

What do millionaire footballers and investors in real estate investment trusts have in common? Both emerged from the Treasury’s draft Finance Bill with reason for cheer.

While the likes of Messi and Ronaldo, with a bit of luck and a fair wind, can look forward to a tax-free Champions League final payday come May 2013, anyone investing or interested in investing in real estate investment trusts will welcome changes confirmed in draft legislation that should make the UK Reit regime more attractive for new entrants and work better for the UK’s existing Reits.

There are currently 23 UK Reits with a market valuation of about £20bn. Introduced in 2007, they allow investors to enjoy the same tax treatment as direct property ownership, while benefiting from diversification and professional management and avoiding the significant upfront cost and risks and responsibilities of day-to-day ownership.

Reits pay no corporation tax on the profits of their property rental business provided they comply with a series of business conditions. A key condition is that they distribute to their shareholders at least 90 per cent of their property investment profits every year.

Where appropriate, the Reit withholds income tax at 20 per cent on dividends, in the same way a UK bank withholds tax on interest income earned by UK taxpayers. Reits’ listed status also ensures high standards of corporate governance, disclosure, transparency and scrutiny by analysts and investors.

Published by HM Treasury, the draft legislation – destined for inclusion in Finance Bill 2012 - sees key requirements in the Reit regime relaxed in the hope of kick starting a new wave of investment in bricks and mortar. The Treasury has said the changes are designed to “support expansion of the property sector and so encourage further investment and stimulate the construction industry”.

First, under the planned changes the “entry charge” that companies pay for joining the Reit regime is set to be abolished. As it stands companies are required to pay 2 per cent of the gross market value of their investment properties. To date this has been a significant barrier to entry and a disincentive in converting to Reit status. It has been suggested this move may attract a number of existing property vehicles back onshore, as well as making Reits a more attractive structure for new vehicles.

Secondly, the draft legislation also allows a Reit to be listed on a wider range of stock exchanges than before, including the Alternative Investment Market and Plus. Previously, the official list of the London Stock Exchange was the only UK option, alongside certain recognised overseas exchanges.

Other important changes are designed to widen the Reit investor pool by liberalising the diverse ownership rule. Currently, Reits must satisfy a variant of the complex “non-close company” test in tax legislation, which requires that the Reit is not controlled by five or fewer persons. From summer 2012, new Reits will have a grace period of three years in which to meet this requirement. The changes could really help new entrants to launch within the Reit regime – although the benefit is limited by the fact that listing of the new Reit’s shares will be required even during the grace period. It is to be hoped that the government will reconsider that point.