Trade bodies representing the United Kingdom’s property industry are calling on the government to introduce a flexible and tax-friendly structure for its proposed new property investment trust vehicles.
The main lobby groups, including the British Property Federation, the Investment Property Forum and the Royal Institute of Chartered Surveyors have been responding to the government’s consultation, launched after the last budget.
They have urged the government to formulate a tax-exempt structure that will produce similar investment returns to the underlying property, along similar lines to US REITS (Real Estate Investment Trusts).
A REIT is a form of collective property investment vehicle, where the investor owns shares or units in a fund that invests in a range of commercial property (such as offices, industrial units, shops and shopping centres) or residential property (such as houses and flats).
Under this structure, a limited amount of tax is paid at the trust level, provided most of the income generated is distributed to investors in the form of a dividend. Most industrialised nations have established some form of REIT market, and until now, the United Kingdom is the only G7 member not to have embraced these kinds of property trusts.
"In line with the principle of replicating direct investment in real estate as closely as possible, there should be no tax on rental income or capital gains in the REIT itself," the IPF announced in its response to the government’s consultation. The Forum also recommends that a withholding tax be levied for basic rate tax payers to avoid overly complicating the system.
Furthermore, IPF suggested that: “The tax regime should include a mechanism for passing investment incentives like capital allowances onto investors to encourage UK REITS to improve the quality of their property stock.”
Given real estate’s high yields, many analysts are predicting strong inflows into tax-exempted REITS which could be introduced in the UK from 2005.
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