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Real Estate Investment Trusts (REITs)

Following 20 years of lobbying by the real estate industry, the UK Government introduced legislation in the Finance Act 2006 to enable the creation of REITs in the UK. These are normal corporate vehicles which make an election to confer exemption from tax on relevant property profits. In return, the REIT must withhold tax from distributions paid to shareholders out of these profits.

This treatment means that the tax treatment of investment in REIT shares mirrors more closely that of direct investment in property. The expectation is that the REITs will deliver greater flexibility and liquidity in the property investment market. Nearly all the major listed companies have announced that they expect to elect from the earliest date of 1 January 2007.

The KPMG real estate team can help with the following:

• Understanding whether conversion to a REIT or set up of a new REIT is the right approach or whether there are better alternatives.
• Advising on the route to REIT status including modelling, the impact on the group and shareholders, listing advice, and advice on pre-conversion restructuring requirements
• On-going advice for REITs including technology solutions to assist in compliance obligations and monitoring regime conditions.

Key characteristics

The current requirements

To qualify as a REIT a company must meet the following conditions:

• UK tax resident (and not dual resident).
• Listed on a recognised stock exchange (i.e. not the Alternative Investment Market).
• Not an open ended investment company
• The only classes of shares allowed are ordinary shares (one class only) and non participating preferences shares.
• Distribute 90 percent of its net taxable rental profits (not capital gains) during the relevant accounting period or within twelve months of its end.
• Derive at least 75 percent of its total profits from its tax exempt property letting business.
• At least 75 percent of the total value of assets held by the REIT must be held for the tax-exempt property letting business.

A group which elects into the regime will need to pay an 'entry charge' equal to two percent of the market value of investment property assets transferred into the REIT. The charge will accrue as corporation tax in the first accounting period in which the group is a qualifying REIT or alternatively the REIT can elect for it to be spread over the first four years.

Key future dates
Regulations finalised and further guidance published	Most likely October 2006
REIT regime commences	1 January 2007

Further information

The content of this web site is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.