A real estate investment trust (REIT) is simply a collective investment vehicle that allows tax efficient investment in property. Its main purpose is to remove the tax disadvantages of investing in property through a collective vehicle (such as a property company) compared to investing directly in property.

REITs have long been popular in the US and a number of other countries, but are new to the UK. The main characteristics of a UK REIT are that it will be exempt from tax on:

  • rental income
  • gains on the sale of property.

However it must:

  • be a listed company
  • not be controlled by five or fewer shareholders
  • have investment properties that comprise at least 75% of the value of its assets
  • make at least 75% of its income from property rents
  • have rental profits that are at least 1.25× interest payments
  • distribute (i.e. pay out as dividends) at least 90% of its tax exempt profits.

The consequences of breaching these conditions vary. In some cases tax is payable depending on the extent of the breach. In other cases a company may lose its REIT status altogether.

The distributions of profit made out of the tax exempt profits are paid after the deduction of basic rate tax. Higher rate tax payers will have to pay further tax on the distributions, but they will be treated as UK property income, not as dividend income.

The above is a rough summary of the implications of the legislation. Taking an investment decision based on the tax treatment of REITs requires further research or professional advice.HM Revenue & Customs website has extensive information on tax issues.

Copyright Graeme Pietersz © 2005-2020