Last Updated: 4 December 2012
Article by Mark Howard

The Finance Act 2012

The real estate investment trust regime (the "REIT Regime") enables qualifying companies to elect to be treated as REITs for tax purposes. The main tax advantage is that REITs are exempt from corporation tax on the profits and capital gains of their qualifying property rental businesses.

The Finance Act 2012 introduced legislation to improve the REIT Regime by addressing barriers to entry and investment. One of the key improvements is the amendment of the Corporation Tax Act 2010 to relax the requirement for REITs to be listed on a recognised stock exchange, thereby allowing REITs to be admitted to trading on AIM or its foreign equivalent (subject to the usual eligibility requirements).

In addition, the Finance Act 2012 introduced a number of measures to help support and encourage expansion of the REIT Regime within the property sector, including:

  • abolition of the 2 per cent. (of gross market value) entry charge paid by a company on joining the REIT Regime;
  • relaxation of the non-close company requirements, including the introduction of a three year grace period for a REIT to satisfy such requirements;
  • introduction of the "diverse ownership rule" for institutional investors, whereby certain institutional investors may hold shares in a REIT without the REIT breaching the non-close company requirement;
  • amendment of the definition of a "good asset" to include cash, for the purposes of the balance of business assets test which ensures that REITs are primarily property investment vehicles; and
  • amendment of the definition of "financing costs" (for the purpose of the profit financing cost ratio which prevents a REIT from over borrowing) to include interest and interest equivalents paid on borrowing in order to purchase a property rental business.

Relaxation of the listing requirement

A notable change introduced by the Finance Act 2012 is the relaxation of the listing requirement. The principal aim of this amendment is to increase accessibility to the REIT Regime for companies which do not want the regulatory and administrative burden of being admitted to trading on the Main Market of the London Stock Exchange. The Government expects the new legislation to encourage investment in the property sector and facilitate investment in REITs.

This legislation is an opportunity for new REITs, and companies looking to convert to REIT status, to attract new investment via an institutional placing and listing on AIM. In addition, those currently on the Main Market could move to AIM to reduce their continuing obligations. However, for those REITs with significant numbers of retail investors, such a change may not be practical. Many retail investors hold shares in an ISA wrapper and unfortunately AIM quoted shares are not qualifying investments under the Individual Savings Account Regulations 1998 (as amended). Consequentially, any move down from the Main Market would generate a material negative tax impact for any retail investors holding shares in an ISA.

Key opportunities for property rental companies, both public and private, considering conversion to REIT status include:

  • The opening up a new pool of potential investors as some investors may be prohibited from investing in property rental companies without REIT status
  • REITs are attractive structures for investors as the distributions they receive are treated as property income. This will be particularly appealing for investors who are tax exempt.
  • Companies currently based offshore for tax purposes may be able to obtain comparable tax efficiency through conversion, so it may be viable for them to choose to forego their offshore status. This could result in substantial savings as the retention of non-executive offshore directors and the holding of board meetings outside of the UK would no longer be required.

The REIT structure has rapidly become one of the most popular structures for facilitating investment in the property sector. The Government has highlighted that, since the REIT Regime was launched in 2007, more than three-quarters of the UK's major listed property companies have joined and, as of April this year, there were over 20 UK REITs with a market capitalisation of over £20 billion.1

We have to wait to see whether this new legislation achieves the Government's objectives of providing an adequate incentive for property rental businesses to convert to REITs and facilitate increased investment in the sector. However, the Government is not resting on its laurels and is looking at alternative ways in which the property sector in general, and the REIT Regime in particular, can be given an additional boost.

REITS and social housing

In recent years the Government has strongly backed social housing initiatives. Given the relative lack of available affordable housing, this support looks likely to continue for the foreseeable future. It is envisaged that REITs could play a role in attracting future investment to the social housing sector. Social housing schemes obtain economies of scale and other benefits which are not typically available in the private residential property arena, which could prove to be a draw to REIT investors. However, these advantages are somewhat curtailed by the fact that typical average rental income in the social housing sector tends to be substantially lower than in the private market.

As REITs have invested almost exclusively in commercial property, the Government undertook a public consultation earlier in the year on the role which REITs could play in supporting the social housing sector. The consultation also considered the tax treatment of REITs investing in other REITs. The consultation closed on 27 June 2012 and we await the outcome.


1 1 HM Treasury, Consultation on reforms to the real estate investment trust (REIT) regime, April 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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