Why use a UK REIT?
A REIT provides a tax efficient means of investing in UK real estate for institutional investors. A REIT is exempt from UK corporation tax on income profits from its UK property rental business and exempt from UK corporation tax on gains arising from the disposal of UK property used in the UK property rental business. The REIT needs to meet a number of conditions, including the requirement to distribute 90% of its UK property income profits within 12 months of the end of each accounting period.
There are some key benefits which can put a REIT at an advantage to other investors in UK property:
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a REIT can acquire a company owning UK property without having to take account of any contingent gain within the company (the property is re-based to market value on the company joining the REIT group without triggering any chargeable gain);
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a REIT can dispose of UK property used in the UK property rental business and re-cycle the proceeds to invest in other UK property without triggering any chargeable gain (capital proceeds are not required to be distributed by a REIT);
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a REIT can dispose of shares in a UK “property rich” company and benefit from an exemption from UK corporation tax on any capital gain arising from the share disposal (to the extent that the gain is attributable to UK property used in the property rental business of the UK “property rich” company); and
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a buyer can acquire a company owning UK property from a UK REIT without any contingent gain in the company (as a result of the property being re-based to market value in the company on exit from the REIT group, provided that the company does not dispose of the property for a period of at least 2 years after leaving the REIT group).
What is a private REIT?
From 1 April 2022, one or more institutional investors have been able to establish a “private” REIT (whose shares do not have to be admitted to trading on a stock exchange). The creation of the private REIT is a result of the changes made to the REIT ownership condition and to the rule relating to 10% corporate shareholders in a REIT (known as “holders of excessive rights” or “HoER”).
A REIT must either have:
- 100% of its ordinary share capital admitted to trading on a recognised stock exchange; or
- at least 70% of its ordinary share capital owned, directly or indirectly, by institutional investors.
Institutional investors for these purposes include a widely-marketed fund, a pension scheme, a life insurance company, a sovereign immune, a UK REIT and a non-UK equivalent to a UK REIT.
There is a 12 month grace period if the 70% ownership condition ceases to be met.
If a REIT pays a property income distribution to a HoER, then there is a corporation tax charge on the REIT. However, a UK resident corporate shareholder holding 10% or more of the shares in a REIT is not treated as a HoER. This means that UK institutional investors can generally own more than 10% of a REIT, but non-UK institutional investors may have to “fragment” their ownership interests so that they hold indirectly through a series of vehicles each of which own less than 10% of the REIT.
The REIT rules are not clear on how the HoER rule applies to a shareholder in a REIT which is a partnership with both UK and non-UK corporate partners. However, it is understood that HMRC accept that you can look through the partnership so that a UK resident corporate partner beneficially entitled to 10% of the distributions from the REIT through the partnership should not be treated as a HoER in respect of its share of the REIT distribution.
What structures can institutional investors use to set up a UK REIT?
It is possible for a UK institutional investor to own directly 100% of the shares in a REIT (see figure 1)
A non-UK institutional investor (such as a US REIT) can indirectly own a UK REIT through 11 non-UK companies (each of which owns less than 10% of the REIT).
A widely-marketed fund (which meets the diversity of ownership condition) with a mixture of UK and non-UK investors can establish a REIT
The proposed changes to the UK taxation of sovereign immunes could lead to the establishment of more private UK REITs. The Government has published a consultation proposing that sovereign immunity from UK direct tax should be restricted to UK source interest income from April 2024. Specifically, income and gains of a sovereign immune from investing in UK immovable property would be brought within the scope of UK tax. Consequently, sovereign immunes may want to look at whether some of the benefits outlined above (see “Why use a UK REIT?”) would make it attractive to establish a UK REIT.
Authored by Elliot Weston.
Elliot Weston is head of the UK Tax & Incentives practice at Hogan Lovells. He has been involved in the REIT regime since its launch in 2007 and has advised on the establishment, restructuring and merger of numerous REITs. This year, he advised Landsec and M&G Real Estate on the launch of Bluewater REIT, a private REIT which took effect on the first day of the new private REIT regime in the UK. He has also advised Shaftesbury PLC on its recommended £5bn all-share merger with fellow FTSE-250 listed Capital & Counties Properties PLC, the largest public UK REIT merger.
