Article

New property investment vehicle launched

The background

With effect from 1 January 2007 the Government launched Real Estate Investment Trusts (REITs). This introduces a new way of investing in the UK property market. A REIT is a company which owns and
operates income-producing property which can be commercial or residential. The pool of money invested through shares in the REIT is used to buy, develop, manage and sell property assets. Most of this income is distributed to shareholders and in return the company is exempt from corporation tax.

The underlying reason for the introduction of REITs is that the Government wishes to ensure a stable property market with long-term growth and long-term investment instead of a ‘boom and bust’ cycle. The Government also aims to encourage private sector investment in the residential market and to give access to more complex property deals to the ‘man in the street’.

Benefits for the company

Provided certain conditions are met, a company can conduct property rental business as well as ‘other’ business free from corporation tax. Profits arising from the ‘other’ business will be taxed as usual. To become a REIT a company must satisfy a set of qualifying conditions including that the company must be listed on a recognised stock exchange (a listing on AIM is not sufficient). Other conditions are that a company must be UK resident and that at least 90% of the income profits must be distributed as a dividend. In addition, there is an entry charge on becoming a REIT of 2% of the gross market value of the properties involved at the time the company changes to REIT status.

Benefits for the investor

Instead of simply investing in stock in a single company an individual investor can buy a portion (in the UK no more than 10%) of a managed pool of property. The profits from the property rental business are then distributed directly to the shareholder by means of a dividend. This dividend is taxed in the usual way.

Conclusion

At the time of writing the take-up of REITs has been slow, both in terms of the number being established and in terms of investment by ‘the man in the street’. At the same time, the concept of the REIT is successfully established in many other jurisdictions including the US, Australia, Hong Kong and France, so it may simply be a matter of time before they become popular in the UK. We will report on progress in future editions of Business Law.

For further enquiries please contact Gilbert Green (view full profile) on 01892 701237 or email gilbert.green@ts-p.co.uk.

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