UK REITS Doomed To Failure Unless Tax Regime Is 'Radically Simplified,' AITC Warns

by Robert Lee, Tax-News.com, London

07 February 2006

The Association of Investment Trust Companies (AITC) has urged the British government to radically simplify the tax regime under which proposed UK Real Estate Investment Trusts (REITS) will operate, or face the prospect that no new UK REITS will be launched at all.

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

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.

Their introduction in the UK has been delayed after the government decided to put its proposals to a second period of consultation. But Daniel Godfrey, Director General of the AITC, said that there is "a very real risk" that there will be no new UK REIT launches at all unless the Treasury takes steps to simplify the proposals.

In particular, the Association points to a condition that no person can control 10% or more of the share capital or voting rights of a REIT, which it says will be "completely unworkable".

The AITC says that in its current form, the proposed REITs tax legislation is much longer, and the conditions are far more complicated and onerous than those for investment trusts. The AITC is expecting UK REIT legislation to be about twenty pages long. This compares to the two pages of legislation governing investment trust taxation.

"Inflexible legislation sounded the death knell to Housing Investment Trusts, which have been a complete failure. Not a single Housing Investment Trust has been launched in the ten years since their introduction," Mr Godfrey observed.

"We urge the Government to rethink its position on the tax regime for REITs and to dramatically simplify the legislation otherwise there may well not be a single new UK-REIT launched," he added.

Furthermore, Mr Godfrey predicted that with a market for investment companies domiciled overseas with a listing in the UK already well established, it is even more likely that REITS will fail to get off the ground in the UK under the government's proposed legal framework.

"Whereas in the past, UK investors may have had concerns about investing in an offshore company, investment centres such as Guernsey and Jersey are now recognised as being commercially attractive with a robust regulatory regime for investor protection," he noted.

According to the AITC, more than GBP2.4 billion was raised by offshore closed-ended funds in 2005, which compared with just GBP249 million raised onshore last year. Moreover, of the total raised offshore, GBP1.3 billion was raised by offshore property investment companies.

"This demonstrates there is a tried and tested market for these property funds which will be able to compete with UK REITs," Mr Godfrey observed.

"The crucial question for the Government is whether a UK REIT will be as attractive from a commercial perspective than the alternative offshore route. If this is not to be the case, then there will simply be no UK REIT launches," he cautioned.

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