Real Estate Investment Trusts

The Government recently published its draft legislation on Real Estate Investment Trusts (REITs), which will be companies listed on the stock exchange which carry out a ‘qualifying property letting business’. Already, in his latest budget, the Chancellor has announced changes to the proposals.

To qualify as a REIT, a minimum of 75 per cent of the company’s profits must be derived from property letting and three-quarters of its asset value must be in the form of assets used in the qualifying activity. An ‘entry charge’ of 2 per cent of the market value of its investment properties will be payable when a company becomes a REIT.

REITs will be exempt from corporation tax on their qualifying property rental income and will not pay corporation tax on chargeable gains arising which relate to the REIT properties. They will pay corporation tax at the usual rates on the profits arising from non-qualifying activities. They will be required in normal circumstances to distribute 90 per cent of tax-exempt profits, from which tax at the basic rate will be deemed to be withheld for both UK residents and non-residents.

For tax exemption, the REIT must contain at least three properties and no one property may exceed 40 per cent of the value of all the properties in the qualifying business.

HMIT has published guidance on its interpretation of various provisions relating to the REIT regime and, in particular, on the scope of restrictions on dividends payable.