The changes proposed will form part of the Finance Act 2012 which will receive Royal Assent in July 2012.
Currently a UK REIT:
• is a non-close, closed-ended UK tax resident company;
• which is listed on an HMRC recognised stock exchange;
• which is exempt from tax on its “property rental business (PRB)” income and capital gains, provided that it satisfies certain conditions, including:
• that at least 75% of its income and assets are in PRB;
• that it holds at least three properties, no one of which is more than 40% of the value of the assets of the REIT as a whole; and
• that it distributes 90% of its income profits.
The REIT can be either a single company or a group structure.
The changes proposed:
• complete abolition of the present 2% conversion charge;
• relaxation of the “listing” requirement, so that REITs now only need to be “traded on a recognised exchange”, which will include other exchanges such as AIM;
• introduction of a new class of “institutional investor” which can hold shares in the REIT without breaching the non-close company requirement; “Institutional investor” is a defined term, but will include, for example, pension schemes, life companies, UK OEICs and authorised unit trusts (and foreign equivalents) and sovereign wealth funds, who are exempt from UK income and corporation tax by reason of sovereign immunity. (Attention will need to be given to the 10% rules where the institution is a corporate, but there are ways of dealing with this);
• introduction of a three year “grace” period in which the company does not need to be non-close;
• changes of rules so that cash held will not be a bad asset for the REIT rules;
• Technical changes to the interest-cover test, so that it becomes more related to actual recurring borrowing costs, such as interest and less subject to volatile or one off costs, such as break costs; and
• changes to the rules on stock dividends making them easier to operate within the REIT rules.
The changes could be an opportunity where UK real estate assets sit at a substantial gain to set up a REIT tax efficiently, with a view to a whole or partial exit at some point or indeed to bring in more capital to diversify.
If selling or REITing an SPV, this could be done potentially without SDLT for the buyer or any discount on price or immediate charge for the seller.
Even those with multi-let single asset properties may be able to take advantage of the regime tax efficiently.
For those who are non-doms, it may be possible to consider appropriate structuring to achieve non UK situ assets for IHT and CGT remittance basis.
Residential “buy to let” assets will now be candidates for REIT structuring.