New Private UK-REIT is already attracting huge interest

6 minute read
31 March 2022

A significant relaxation of the UK REIT rules comes into force from 1st April 2022. These changes will be of particular benefit to institutional investors (such as pension schemes, insurance companies and limited partnerships that are collective investment schemes).

This relaxation means that a UK-REIT could become the investment vehicle of choice for institutional investors.

What is a UK-REIT?

A UK REIT is a UK company limited by shares (or a group of such companies) which invests in real estate assets and carries on a property rental business. A company obtains its UK REIT status by meeting the relevant conditions, and maintains that status by continuing to satisfy those conditions. The conditions are set out in Part 12 of the Corporation Tax Act 2010. 

The company becomes a UK-REIT once it enters the REIT regime. It enters this regime by giving the appropriate notice to HM Revenue & Customs. The notice must confirm that the 'gateway' conditions for REIT status have been met, and the other conditions will be satisfied in the company's first accounting period in the UK-REIT regime.

What are the Key Benefits of being a UK-REIT?

The benefits are considerable:

  • A UK-REIT is exempt from UK corporation tax on profits (both income profits and capital gains) arising from carrying on a qualifying property rental business. This means that, for a shareholder in a UK-REIT, the tax impact is similar to direct investment in real estate. Using a UK-REIT means there is no direct tax leakage in the vehicle from the property rental business.
  • Given that tax on the profits of the UK-REIT's property rental business is levied at shareholder level (rather than on the UK-REIT), tax-privileged investors (such as registered pension funds) are able to claim exemption from tax on payments representing property profits received from a UK REIT.
  • When a REIT acquires a company owning property investments, the base cost of the underlying property assets is stepped-up to market value at the date of joining the REIT - such that any latent gain within the target is 'washed out'.
  • There is no tax charge on a company becoming a UK-REIT. There used to be a tax charge (based on 2% of gross value of assets) for transfer of real estate into the UK-REIT regime. This charge was abolished in 2012.
  • Distributions made by the REIT out of exempt rental income and gains are subject to withholding tax at 20% but payments can be made gross (without deduction) where a shareholder is a UK corporate, a UK pension fund or a UK charity.

What has changed that makes UK-REIT more attractive now?

  • To qualify as a UK-REIT, a company had to be admitted to trading on a recognised stock exchange. Complying with this condition involved significant cost, and presented some regulatory restrictions. The condition is to be removed where at least 70% of the company's ordinary shares is held by one or more 'institutional investors'.
  • Removing the "holder of excessive rights" tax charge that currently applies to those holding more than a 10% interest in the UK-REIT where property income distributions (PIDs) from the REIT are paid to shareholders entitled to gross payment (principally UK tax-resident corporates and registered pension schemes).

These amendments make the UK-REIT significantly more attractive as a tax-efficient 'club' or joint venture vehicle which will enhance investment in relevant real estate assets and allow the UK vehicle to compete with other offshore options (such as Jersey property unit trusts).

UK-REITs more generally

In the event that the UK-REIT looks of interest, investors and fund managers will still need to consider carefully the other qualifying conditions and requirements that continue to apply (which are by no means simple). The changes are however are very welcome to see.

If you have any questions or are interested in learning more please contact Sharon Ayres, Lee Nuttall or your usual Gowling WLG contact.

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