UK Considering Introduction Of US-Style Tax-Friendly Property Trusts

by Robert Lee, Tax-News.com, London

02 December 2003

The UK government is said to be considering the introduction of property trusts similar to Real Estate Investment Trusts, or Reits, a common investment vehicle in the United States and elsewhere, in a bid to dampen the boom and bust cycles of the UK housing market.

The proposals are expected to form part of the recommendations of the review on housing supply overseen by Kate Barker of the Bank of England’s Monetary Policy Committee. The results are to be announced in Chancellor Gordon Brown’s pre-Budget report on December 10.

By allowing investors to utilise the tax-friendly investment trusts, Brown is hoping to lower the cost of capital in the real estate sector and so boost development, thus increasing the housing supply.

Reits distribute a large proportion of taxable income to investors, which avoids the incidence of capital gains tax at the corporate level. The introduction of the property trusts is supported by the real estate industry, and would encourage both institutional investors and individuals to invest in the rental sector.

Brown is concerned that the high rate of home-ownership in the UK relative to other countries, such as Germany (where 43% of homes are owner occupied, compared to 70% in the UK) leaves Britain less able to cope with fluctuations in interest rates. Reits could create a balance by giving a helping hand to the development of a larger rental sector.

Another option which may be pursued by the government to influence the supply of housing is the imposition of a land holding tax on developers designed to encourage them to build more quickly, and thus help meet the growing demand for homes.

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