BN 03: UK Real Estate Investment Trusts
Who is likely to be affected?
1. Companies and groups of companies whose main business is property investment, and people who invest in them.
General description of the measure
2. The measure puts in place a regime that exempts income from and gains made on property from tax, provided the company or group meets certain conditions.
3. The measure also changes the character of dividends paid by companies that join the regime, to the extent that they relate to tax-exempt profits. These dividends are treated as income from UK property for UK tax purposes and are paid under deduction of basic rate income tax.
Operative date
4. Companies and groups can elect to join the regime with effect from 1 January 2007.
Current law and proposed revisions
5. Where a company owns property, it is chargeable to corporation tax at 30%, on the net rents received (section 15 Income and Corporation Tax Act 1988 (ICTA)) and under section 1 Taxation of Capital Gains Act 1992 on any gains made when property is sold. When a company distributes these profits to investors, they are treated as normal dividends for tax purposes, as set out in Part VI of ICTA and Chapter 3 Part 4 Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
6. For many investors, there is no further tax to pay on the dividends. This is because UK companies are in general exempt from tax on UK dividends (section 208 ICTA), and for individuals, the tax credit attached to the dividend meets the liability to tax for all but higher rate taxpayers (section 397 ITTOIA). Higher rate taxpayers pay additional tax of 25% on the dividend. The tax credit cannot be paid to investors whose liability to UK tax is less than the tax credit.
7. For companies or groups that meet the necessary conditions for the regime, the measure will allow them to elect for special rules to apply to their property business and to their distributions. Those that elect will be known as UK-REITs (Real Esta te Investment Trusts).
8. For UK-REITs, their qualifying rental income and gains on disposals of investment properties will be exempt from corporation tax. Profits and gains on any other activities carried on by the UK-REIT will be subject to corporation ta x in the normal way.
9. Distributions paid out by a UK-REIT, so far as they are paid out of taxexempt property income or gains, will be treated as UK property income. They will be chargeable to tax under Schedule A (section 15 ICTA) (for corporation tax) or section 268 ITTOIA (for income tax) and paid out to investors under deduction of basic rate income tax (22%). Dividends paid out of other profits will be treated as normal dividends for UK tax purposes. The detail of the administrative arrangements for accounting for tax deducted from payments will be included in regulations.
10. The conditions that have to be met to come within the UK-REIT regime cover:
- the company (or the parent company in the case of a group),
- the business carried on, and
- a requirement to distribute at least 90% of the tax-exempt profits each year.
11. The conditions the company must meet include the following:
- it must be UK resident for tax purposes,
- its shares must be listed on a recognised stock exchange, and
- no one investor may be beneficially entitled to 10% or more of distributions or control directly or indirectly 10% or more of the share capital or voting rights.
12. The conditions that relate to the business are that:
- 75% or more of its assets must be investment property,
- 75% or more of its income must be rental income, and
- the ratio of taxable rental profits before interest and capital allowances to interest on loans to fund the tax-exempt business must be more than 1.25:1.
13. Companies or groups wanting to become UK-REITs will pay an entry charge of 2% of the market value of their investment properties at the date the company or group joins the regime. This charge will be collected at the same time as any corporation tax that is due for the first accounting period the regime applies to them. Companies or groups will be able to spread the charge over four years, in instalments of 0.5%, 0.53%, 0.56% and 0.6% if they prefer.
14. The legislation relating to “housing investment trusts” (sections 508A and 508B ICTA) is being repealed at the same time.
Further advice
15. The measure to permit UK-REITs follows two consultation papers (Budget 2004 and Budget 2005). Draft clauses and explanatory notes setting out the framework for the regime have been published on the HMRC website in several stages, starting 14 December 2005. An updated version of these explanatory notes is published today on the HMRC website, alongside this Budget Note.
16. If you have any questions about this change, please contact Nicola Westbrooke on 020 7147 2588 or Claire Gough on 020 7147 2548.
