UK To Introduce REITs In 2007

by Jason Gorringe, Tax-News.com, London

27 March 2006

Accounting and property industry experts have welcomed changes to the structure of UK real estate investment trusts (REITs), which are due to be introduced on January 1, 2007 after Chancellor of the Exchequer Gordon Brown's Budget announcement last week.

Under the new structure, the charge payable to enter into the regime will be equal to 2% of the gross market value of the properties that transfer into a REIT - significantly lower than had been envisaged during the lengthy consultation period in the lead up to Brown's eventual announcement last Wednesday.

"More listed property companies are likely to find this affordable," commented Charles Beer, Head of Real Estate at KPMG who believes that the Chancellor has largely heeded the concerns expressed by the industry over the Treasury's original proposals.

“As a result of changes announced in the Budget it is now more likely that a significant number of property companies will convert to Real Estate Investment Trusts in 2007," he predicted.

Another key change means that the distribution requirement has been reduced from 95% to 90% of taxable profits and REITs now have 12 months to make the distribution instead of the originally proposed 6 months.

Experts have expressed reservations over a provision in the rules which prohibits a shareholder from owning more than a 10% stake in a REIT which Mr Beer described as a "major concern." There is also no transitional relief for existing shareholdings.

However, a company will no longer be disqualified from the regime in the event that a shareholder holds 10% or more of its shares or votes. Instead, a tax charge will be levied on the company in the event that it pays a dividend to a shareholder holding 10% or more, unless the company has taken reasonable steps to avoid paying such distributions

In other changes announced in the budget, the interest cover ratio requirement has been reduced from 2.5:1 to 1.25:1 and REITs will now be able to issue fixed rate preference shares and convertible debt, which had previously been precluded.

“The Treasury has responded positively to a number of industry’s concerns," noted Peter Beckett, Tax Director in Ernst & Young’s Real Estate Group.

"Several quoted UK property groups now seem likely to convert into REITs in 2007," he added.

Nonethless, others, such as Phil Nicklin, real estate tax partner at Deloitte, believe that the conversion charge may still discourage those who have established listed property companies offshore to come back into the UK, although he remained broadly supportive of Brown's changes.

“The Treasury has taken on board most of the major points made by the property industry during the consultation process. The revised rules will result in a flexible regime, which makes it likely that the major listed UK property companies will convert to a REIT and that the REIT sector will get off to a good start," he observed.

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