First proposed as long ago as Budget 2004 and much consulted upon since, the statutory regime for UK REITs will finally be enacted in Finance Act 2006 and will go live on 1 January 2007 when companies and groups will be able to elect to join the regime.
Many countries already have a form of REIT property investment. The UK REIT offers tax exemption on income and gains from investment property subject to qualifying conditions including as regards the type of business carried on, the use of a UK resident vehicle and the listing of its shares on a recognised stock exchange. No single investor may (broadly speaking) receive beneficially more than 10% of distributions or control more than 10% of share capital or voting rights of a REIT.
The Budget Press Release announces some welcome positive changes in the conditions previously proposed and other features which had cast doubt on the viability of the UK REITS within the UK property industry.
- The conversion charge for property companies deciding to become REITs has been set at 2%, which may be spread over 4 years, to be collected at the same time as corporation tax. This is likely to be viewed as an acceptable charge for accessing REIT benefits.
- 90% of net profits must be distributed rather than the 95% initially proposed in the draft legislation.
- The requirement to maintain interest cover in the ratio of 2.5:1 has been halved to 1.25:1.
- The loss of a REIT's advantageous tax status if any shareholder acquires a stake in excess of 10% has been relaxed.