Property has long been a popular diversifier, partly because bricks and mortar give investors a sense of physical security. However, with bank lending at an all time low, buying property as an investment is not as simple as it once was. Furthermore, those looking to make a gain on their investment are faced with double taxation – capital gains tax at 18 per cent, as well as income tax on the profit.
As a result, investing in property through a real estate investment trust (Reit), has grown in popularity. This is because Reits, which have been around for decades, but were only introduced in the UK in January 2007, offer tax advantages, high yields, and allow an investor to exit on much shorter notice, should markets take a turn for the worst.
A Reit is a security that sells like a stock on the major exchanges and invests in property directly. After paying a fee to convert to Reit status, however, a Reit escapes corporation tax. It must also pay out 90 per cent of its property income to shareholders. Individuals can invest in Reits either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specialises in listed real estate.
Phil Nicklin, Reits and major corporates lead tax partner at Deloitte, argues: “Reits are exempt on rental from investment properties and capital gains tax (CGT) on investment properties, so the first time there is any tax is when the investor receives a dividend on the Reit. If an investor invests in a normal investable company, like a Shell or BP, that company pays tax, and when the dividend is paid out to shareholders the shareholder also pays tax.”
Payouts are subject to a withholding tax at basic rate income tax, except for certain classes of investors who can register to receive gross rather than net payments. These include charities, UK companies and pension funds. Reits can also be held in Isas and child trust funds (CTFs), and the managers of these can receive payouts gross of tax.