The Government has published draft legislation for the introduction of the Real Estate Investment Trust. This follows on from a lengthy period of consultation (including the publication of two consultation documents), which will continue up to the finalisation of the legislation in next year’s Finance Bill.
REIT status will be open to companies resident in the UK and publicly listed on a recognised stock exchange. At least 75% of the activities of the REIT must relate to a "qualifying property letting business" both by reference to the profits arising from, and the value of the assets relating to, the business. This is defined and seems to confirm that hotels will be included although in order to qualify for REIT status the REIT must hold a minimum of three properties so that a company owning a single flagship hotel will not qualify. However, a single property will be defined by reference to a single let unit so that a shopping centre would be treated as a single property. In addition, a single property must not exceed 40% of the value of all the properties.
Therefore, a REIT will be permitted to carry on non ring- fenced business (for example, development undertaken with a view to generating a trading profit) provided that it represents no more than 25% of the activities of the REIT as a whole. The REIT will be exempt from corporation tax on qualifying property rental income and chargeable gains relating to the ring-fenced business. Profits and gains arising from the non ring-fenced business will be subject to corporation tax in the normal way.
The REIT will be required to distribute 95% of the profits from its ring-fenced business by way of dividend unless it is prevented from doing so under corporate law. A REIT will be required to withhold basic rate tax on distributions made to shareholders. In the case of companies distributions will be taxable under Schedule A while those within the charge to income tax will be treated as if in receipt of profits of a UK property business. Controversially, non-residents will be treated in the same way as residents so that presumably distributions will be treated as income from a property business and therefore taxable in the UK. Whether this approach will comply with the UK’s obligations under its double taxation treatie is something that will need to be considered further.
The Government has opted not to specify mandatory gearing requirements. Instead, in relation to its ring- fenced business the REIT will be subject to tax in respect of any amount by which the interest payable in respect of its ring-fenced business exceeds an interest cover ratio of 2.5. The interest cover ratio is the taxable profits of the ring-fenced business divided by the interest payable in respect of that business. Further details relating to this charge is to be included in regulations.
As noted at the time of the Pre-Budget Report 2005, the draft legislation does not deal with the conversion charge. The Government has made it clear that the level of conversion charge is to be regarded as the "balancing figure" that ensures the introduction of the REIT is tax neutral for the Exchequer. It is thought that the Government will consult a number (if not all) of the property companies that might consider converting to REIT status to gauge the likely level of take-up at any given conversion charge rate. At this stage it is not yet known whether the conversion charge will be based on gross assets or unrealised gains.
The draft legislation contains a raft of conditions that would need to be met by a company in order to qualify for REIT status. Companies meeting the requirements will be able to elect for REIT status for accounting periods beginning on or after 1 January 2007.
We intend to publish a more detailed review during the course of next week following a seminar that is being held by the Revenue. The Government requires any comments on the proposed legislation by 27 January 2006.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 16/12/2005.
