REITs: Finance Bill

Proposed changes to the real estate investment trusts (REITs) regime have been incorporated into the draft Finance Bill 2012 as issued on 6 December.

The improvements included within the draft legislation are very welcome and should encourage much wider use of REITs.

• The legislation, as presently drafted, will make the following positive changes, which if implemented are expected to be effective from the date of Royal Assent of Finance Bill 2012.
• Abolition of the conversion charge for companies joining the REIT regime (the 2% upfront charge on property values). This will clearly encourage new entrants and would be attractive to investors from overseas.
• Increased accessibility to capital markets for start-ups and smaller companies by permitting REITs to list on AIM and PLUS markets and their foreign equivalents. This will save set up time and costs (currently REITs must be listed on a recognised stock exchange), thereby encouraging more listed companies to enter the REIT regime and will also make the facility available to a much wider group of companies.
• The introduction of a grace period of three years for meeting the non-close company requirement. There will be a penalty regime, but none will be levied if at the end of the grace period the close company rules are not met for legitimate reasons (i.e. the REIT was formed for reasons other than solely a tax advantage). This will enable a REIT to start as a close company with the intention of obtaining more investors once it has been established and has a track record to attract potential investors. The current rules only permit the non-close company test to be failed on entry provided the REIT submits a notice that it reasonably expects to meet the test throughout all of the first accounting period as a REIT apart from the first day.
• Financing costs will be redefined for the interest cover test so that interest paid on excessive borrowing is measured rather than the total finance costs incurred in the borrowing. Currently at the beginning of each accounting period at least 75% of the value of total assets of a REIT must be represented by assets of the property rental business. In addition, cash realised from the sale of a rental property business asset and awaiting reinvestment can only count as an asset of the property rental business for two years from the date of disposal. The draft legislation removes the two-year restriction on cash realised from a disposal counting as an asset of the property rental business, and permits cash to be taken into account in assessing whether the 75% test is met. These measures should enable REITs to finance their activities more appropriately and make spending decisions based on commercial issues rather than tax issues.
• Introduction of diverse ownership rules for institutional investors. This will make REITs more accessible to a wider group of institutional investors, thereby increasing the availability of capital.
• A lengthening of the extended time limit available in certain circumstances for complying with the distribution requirement from three to six months where the distribution is met by share capital in lieu of cash. This will reduce operational costs and is more appropriate for the sector.

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