| REIT 101: towards a UK REIT |
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| 20/02/2005 | |
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Andrew Wylie, who answers this week's 101 on REITs, works in the investment funds group at Macfarlanes, the City law firm. 1-How much progress has been made towards the creation of a UK REIT? In March 2004 the government published a consultation document which invited views about the possible introduction of a new form of tax advantaged property investment vehicle, commonly known as a Real Estate Investment Trust or REIT. The consultation document proposes a savings and investment vehicle that would achieve two key goals. First, it would allow for a liquid and stable market in property investment that is widely accessible to retail investors and could expand the private rented sector. Secondly, it would align as closely as possible the after-tax return from holding property indirectly through a REIT with the after-tax return from direct property investment. The consultation document makes clear, however, that the government must not suffer any overall loss of tax revenues from the introduction of REITs. The consultation document has been partly prompted by concerns that the UK is now one of the only G8 countries not to have a form of REIT. The USA and Australia have the largest and best established REIT markets, Japan has a burgeoning REIT market, and since the introduction of SIICs in France in December 2003 no less than seven major listed French property companies have converted to SIICs. Furthermore, Germany proposes to introduce legislation allowing for the establishment of a German REIT in January 2006. The consultation document made few firm proposals and asked many questions. The formal consultation period closed on 16 July and the three leading property membership organisations in the UK, the BPF, the IPF and the RICS submitted a joint response which includes their proposals for the "ideal" REIT. 2- What has been the industry response to the government consultation? The industry response recommends that REITs should be tax advantaged, closed-ended companies which are as flexible and lightly regulated as possible. It therefore proposes that it should be left to individual REITs to choose whether they wish to be publicly listed or unlisted, to have limits on gearing and development, to invest in all or only some types of property (including hotels), to be internally or externally managed and to retain or distribute capital gains. Tax issues The industry response proposes that REITs should be taxed as follows. First, REITs would not be liable to UK tax on rental income or capital gains (but would be liable to corporation tax on non-rental income). Secondly, investors in REITs would pay income tax on distributions of rental income, and such distributions would be subject to withholding tax at the basic rate of income tax (currently 22%) so that basic rate taxpayers would be able to invest in a REIT without needing to submit a self-assessment return. Third, investors in REITs would pay capital gains tax on distributions of capital gains, so that they would be able to use their annual exempt amount (currently £7,900) and claim taper relief, and would also be entitled to capital allowances. Fourth, dealings in shares in REITs would attract stamp duty at the rate of 0.5%, which is the same as the rate for dealings in shares in ordinary UK companies, shares in investment trusts and units in unit trusts, and therefore allows REITs to be competitive with such vehicles. (By contrast dealings in limited partnership interests are now chargeable to SDLT at the rate of 4% which has led to the restructuring of many such vehicles as Jersey property unit trusts). In return for the favourable tax treatment of REITs, the industry response accepts that REITs should be required to distribute a high proportion of their net income, in line with international standards, and the principle that some or all entities which wish to convert to REITs should pay a conversion charge to ensure no overall loss of tax revenues and fairness to all taxpayers. Conversion charge Clearly, the level and nature of any conversion charge will be crucial to the success or failure of REITs. Such a charge could be structured as an "exit charge" or an "entry charge". The former would be a percentage of the unrealised capital gains of the converting entity (this was the basis of charge adopted in France where companies converting to SIIC status pay 50% of their latent unrealised gains in instalments). The latter would be a charge based on the gross asset value of the converting entities. In this area the government must tread particularly carefully, since if the conversion charge is too high few or no entities will convert to REITs and the government will not achieve its wider policy objectives. The experience of housing investment trusts or "HITs" is salutary. HITs were launched in 1996 to stimulate investment in residential property, but were regarded by the property industry as being too heavily restricted and having an unattractive tax treatment. As a result, not a single HIT has ever been established. It is therefore to be hoped that the government will consult closely with the property industry over the coming months to devise an acceptable conversion charge. 3- How is the introduction of a UK REIT likely to affect the investment environment? Impact on existing vehicles REITs could stimulate the UK commercial and residential property market, provide an attractive savings and investment product for both retail and institutional investors, and help establish London as the centre of the European property fund management industry. Inevitably, REITs would have an impact on existing property investment vehicles. Depending on the level of the conversion charge, it is likely that a significant number of the 61 property companies listed on the London Stock Exchange would convert to REITs (only 2 of the 187 property stocks quoted on the New York Stock Exchange are not REITs). The extension of the SDLT regime to UK and offshore limited partnerships has led to the restructuring of a large number of them as offshore property unit trusts, and the introduction of an unlisted REIT would be essential to encourage the type of investor which invests in those vehicles to invest in REITs. The FSA's decision in April 2004 to liberalise the regulatory regime governing APUTs and OEICs should make them more attractive as property investment vehicles (there are currently only 3 APUTs and no OEICs which invest in property). Most commentators consider that whether they will prove attractive to investors, particularly if REITs are introduced, will depend, on the government changing their tax treatment to improve, amongst other things, the treatment of institutional investors. There are some signs of progress. First, the Revenue issued a technical paper in July 2004 about possible changes to the tax regime for those funds. Secondly, the Chancellor indicated in the December 2004 Pre-Budget Report that the government intends to make a number of technical changes to that tax regime, and more generally that the government would welcome a constructive dialogue with the industry on whether radical reform similar to that underway for pensions is viable. Timing The Chancellor announced in the December 2004 Pre-Budget Report that the government will not introduce REITs in 2005, but will report back with a discussion paper by the Budget 2005, and will publish a summary of the responses to the Consultation Document at that time. The property industry eagerly awaits that discussion paper which it hopes will be a step towards the introduction of REITs in the UK in 2006. |
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Articles of the same Serie : 101 |
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Articles of the same Topic : Property
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