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Real Estate Investment TrustsBy: Sarah Miles, Partner, Commercial Property, Langleys

Sarah Miles, Langleys

The Real Estate Investment Trust regime (REIT) was introduced to the UK in 2007 and many of the larger property companies have converted to REIT status since then. The regime has been popular in the US and has been a mature market in numerous other countries for many years as a tax-efficient way for a group of investors to hold property.

The government is keen to promote investment in the UK into REITs and has relaxed the rules to make it accessible to a more diverse range of companies and groups of investors. Many of the UK's largest listed property companies have converted to REIT status, including Land Securities, British Land, Hammerson, Liberty International, Brixton, Great Portland Estates, Primary Health Properties, Workspace and Slough Estates. The new relaxation of the rules has resulted in many smaller entities converting to REIT status.

Initially, there was a charge to convert in the form of a 2 per cent entry fee, but in July this year that was abolished, paving the way for smaller companies and start-ups to take advantage of the benefits.
There has also been a relaxation of the rules relating to close company status for the first three years of the REIT. This means that the rule that the REIT must be held by five or fewer investors does not apply for the first three years after conversion/set up.
There are other rules, such as at least 90 per cent of the REITs taxable income must be distributed to the shareholders.

The REIT (or UK-REIT to give it the proper title) is not technically a trust, but is a company that benefits from special tax treatment.

A REIT does not pay corporation or capital gains tax - these liabilities are passed on to the investor who pays tax on the proceeds he or she receives in the form of share dividends. The aim is to provide investors with the kinds of returns they would get if they owned property directly. Therefore there is no double taxation as there would be for investors in a non-REIT company, where the company pays tax on income and the individual pays tax again on dividends.
The REIT enables an investor to invest in property without directly owning it and can often facilitate the pooling of capital to result in higher rewards than can be gained by investing individually. Therefore it can enable investment in portfolios, which would be unachievable with the investor’s individual capital alone.
A REIT is flexible and enables the investor to avoid putting all his eggs in one basket, as it can invest in residential properties as well as commercial and overseas property.
Investors in a REIT do not own property or part of a property, but instead they own an interest in the REIT, which can easily be transferred, offering flexibility and liquidity. The regime enables investment into a diverse range of property, such as buy-to-let, as well as out of town shopping centres for example. There are Stamp Duty Land Tax advantages, too, as a buyer of shares in a REIT will pay SDLT at 0.5 per cent rather than up to 5 per cent otherwise.

Conversion to REIT status for existing companies is relatively straightforward and involves making a tax election.

REITs can also develop property as long as the development is for investment purposes and the property is retained for at least three years following completion or the development is carried out for trading purposes.  

About the author

Sarah Miles is Partner, Commercial Property with Langleys Solicitors LLP in Lincoln. She specialises in commercial, corporate and property law - advising clients on a range of commercial property transactions including acquisition, leases, developments and option agreements. Sarah commenced her career in the law in Lincolnshire in 1996 and went on to qualify with a Lincoln firm in 2003 before moving to head the commercial department as a Partner at Larken & Co in Newark.

Features January 2013

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