UK Treasury Said To Relax REIT 10% Holding Rule

by Robert Lee, Tax-News.com, London

27 October 2006

Rumours that the Treasury will relax the 10% maximum shareholding requirement for the new UK Real Estate Investment Trusts (REITs) to be introduced on 1 January 2007 could be excellent news, says accounting firm PKF.

PKF’s National Director of Tax, Peter Penneycard believes it will help open the door to the property market for small investors. To date, the draft regulations have applied the 10% rule to all types of investor but this will now be relaxed for non-corporate shareholders such as private investors, trusts and some pension funds.

From 1 January 2007, UK tax-resident quoted companies that own and manage commercial or residential rental property can convert into REITs. They will offer investors tax-efficient income and capital appreciation by removing the ‘double taxation’ of property funds where corporation tax is currently paid on profits and income tax paid by investors on the dividends they receive.

The new REITs will have to distribute at least 90% of their rental profits to shareholders through dividends but will largely be exempt from corporation tax. Investors will simply pay tax at their normal rate.

The 10% maximum shareholding requirement was primarily intended to prevent tax avoidance and the loss of tax revenue but was regarded as a major obstacle for companies with large family shareholdings from converting to REITs as it would prevent them from retaining a significant stake in their property businesses, says PKF.

Says Peter Penneycard, PKF’s National Director of Tax: “There are many issues for property companies to consider when converting to REIT status but the relaxation of the 10% rule for non-corporates will encourage more medium sized property companies to convert and smaller companies may even float to become a REIT. This will widen the number of REITs available to small property investors giving them more investment choices and reducing the pressure on the buy-to-let market.

“If the Government wants a truly diverse REIT market, it should also relax the rules on borrowing – the interest cover ratio requirement – to allow property companies with higher gearing to become REITs. Some investors would be prepared to take a higher level of risk by investing in such a REIT.

PKF (UK) LLP is one of the UK’s leading firms of accountants and business advisers and specialises in advising the management of developing private and public businesses. The firm has more than 1,500 partners and staff operating in 22 offices around the country. Principal services include assurance and advisory; consultancy; corporate finance; corporate recovery and insolvency; forensic; and taxation. The firm has particular expertise in advising sectors such as small and medium-sized companies; charities; hotels and leisure; medical; professional partnerships; public sector; property and construction; and technology. The firm’s web site is www.pkf.co.uk.

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