REITs  and the future

 

 

Investment in property in the United Kingdom by public and other property companies has been hampered for some years by the cumulative levels of taxation levied on the companies and their share holders. For this reason a very high percentage of United Kingdom commercial property investments are held in offshore trusts which are subject to little or no tax. 

 

The property industry has been pressing government for a “real estate investment trust” (REITs) structure similar to that in America Australia and other countries which would encourage more people to invest in property. The advantage of such a structure is it will allow the REIT to avoid capital gains tax and corporation tax in return for distributing a high percentage of its annual income to shareholders. The distributions as dividends would incur tax to the individual in the usual way. Such as structure will allow investors to assess more clearly the value of underlying assets in the REIT and compare these with the distributions. The analysis of performance of the “trust” would be far easier than the present system. It is thought that such a structure will allow many more investors to be attracted to the property market than at present. Those countries who have such schemes have shown how successful they are.

 

In the 2006 budget the Chancellor announced the new rules permitting listed property companies to covert to REIT status. This is to be subject to a charge based upon 2% of the gross market value of the investment assets.  This charge will be payable over four years - rather less than the market was hoping for. In return the trust will pay no CGT or Corporation Tax provided that it distributes 90% of its taxable income.

 

At this stage, large listed companies like Hammerson, Land Securities and Slough Estates seem likely to take advantage of the new investment format and transfer some of their assets to it. The first date at which companies can transfer to the new regime is 1st January 2007.Whilst the accounting implications of the new system are still uncertain it does look as if the complexities will tend to make the system attractive only to the bigger property companies.