M&S May Place GBP4 Bn Property Portfolio Into REITs

by Robert Lee, Tax-News.com, London

27 February 2006

British retail group Marks & Spencer is reported to be considering transferring its extensive property portfolio, estimated to be worth GBP4 billion, into tax-efficient real estate investment trusts, or REITS, which are due to be launched by the government in January 2007.

According to a report in The Times which cited an analysis by the investment bank Morgan Stanley, by transferring its property assets into a REIT, cash would be freed up to be invested in M&S's core retail business, while management would also be free to concentrate on the retail side, with the result that its share price would likely rise markedly in value. Investors would also have the opportunity to invest in the M&S REIT and take dividends from tax-free profits.

Already well established in the United States and many parts of Europe, including France, Belgium, the Netherlands, and soon Germany, REITS are typically exempt from tax on rental income and capital gains, as long as most of the REIT's income is distributed in dividends, which are then taxed at the taxpayer's own rate.

Legislation in the UK has yet to be finalised, but some groups, including the Association of Investment Trust Companies (AITC), fear that the tax regime will be too complex, leading to the prospect that no REITs will be formed at all in the UK.

Responding to the government's proposals for the legislative framework for UK REITS, the AITC warned last month that unless the government makes the tax regime more attractive than current proposals, investment managers will simply launch offshore property investment companies where there is already a thriving market for property funds.

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