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Real Estate Investment Trusts (UK REITs) – Update on Proposed Changes

In an earlier article in March 2011 following Budget 2011 we outlined a number of proposed changes to the rules for UK REITs to encourage investment in real estate including residential property and make them more structurally attractive to institutional investors. The proposed modification to the rules should encourage seeding of a REIT by institutional investors.

The UK Government has now given its initial response to the above Budget REITs consultation and proposes the following:

  • The REIT conversion charge being 2% of gross assets payable on entry into the regime will be abolished. This rule had been introduced to extract a tax levy on property assets otherwise subject to corporation tax on chargeable gains being transferred into the new REIT regime. A number of institutional investors and overseas property companies are however exempt from UK capital gains tax e.g. pension funds and there is a separate tax regime for the taxation of life unit linked funds.
  • The Listing requirement will be relaxed to allow REITs to list on AIM and PLUS markets together with their foreign equivalents. However, the Government has reiterated that these changes are not intended to allow private REITs.
  • Close company requirement: the current closed-company rules applying to UK REITs do not recognise the underlying diverse ownership that pension funds and life insurance funds have in terms of beneficiaries and policy holders. This meant that the top five shareholders being those each having 5% or more of the votes of the REIT cannot collectively hold more than 85% of such votes.
  • The above rule is to be replaced by a new “widely held” condition. A fixed three year grace period will be introduced for a REIT to meet the restrictive close company condition. If at the end of the three year period the close company condition is not satisfied REIT status will be lost but there will be no penalty for the failed REIT provided there are legitimate reasons for such failure.
  • Diverse institutional investors: certain types of institutional investor (now awaiting draft legislation from the Government in December 2011 for a definition of such type of investors) will be able to hold shares in a REIT without causing a breach of the close company votes condition mentioned above if they are diversely owned.
  • Finally there will be some housekeeping type changes to deal with cash being treated as a “good” asset in the balance of business asset test; profits/financing ratios; and an extension from three to six months to the time limit for meeting the distribution requirement.

It is expected that the Government will introduce the changes in Finance Bill 2012.

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