What is a UK REIT?
A UK Real Estate Investment Trust ("UK REIT") comprises a company carrying on a property investment business, with its properties let to third-party tenants. It does not need to pay tax on both rental income and gains relating to its property rental business, but for this exemption the REIT has to meet certain conditions and it's required to distribute 90% of its exempt rental income to the investors.
The company can be incorporated anywhere but must be a UK tax resident company whose shares are either listed on the London Stock Exchange or traded on a recognised stock exchange including AIM.
Legal form
A UK REIT can be a single company or a group of companies. The parent or single company (as appropriate) must be listed and be UK tax resident. It cannot be dual resident nor be an open-ended investment company. Broadly, in order for a company to be treated as a member of a group, at least 75% of its shares (by nominal value) must be held by the parent company or another member of the group and the parent company must directly or indirectly have more than a 50% economic interest in the company. Additionally, it may be possible to elect for a company in which the parent company has at least a 40% economic interest to be part of the REIT group.
In order to become a UK REIT, the parent company must file a notice specifying when the REIT rules will apply from and this must be accepted by the tax authorities. There is no entry charge.
Capital requirements
There are no capital requirements (other than those relating to the relevant stock exchange), but there is a limitation on the type of shares that the parent company of a UK REIT can issue, being ordinary shares (limited to one class) and non-voting preference shares, including convertible non-voting preference shares.
Listing requirements
A UK REIT must be admitted to trading on a recognised stock exchange (which includes AIM and similar markets) and either listed on the London Stock Exchange (LSE), or foreign equivalent, or traded on a recognised stock exchange.
For a new REIT there is a grace period of three accounting periods (up to three years) for the second part of the above (rules of the relevant exchange permitting).If the company or group is not so listed/traded at the end of the third accounting period it is deemed to have left the REIT regime at the end of the second accounting period.
Restrictions on investors
There is no minimum number of investors but a UK REIT cannot be close (broadly a company that is under the control of only five or fewer investors) unless at least 35% of the shares are freely available to the public (free float) and certain other conditions are met.
Where a new REIT is formed it can be ‘close’ for the first three years. If it remains close at the end of three years it leaves the REIT regime at the end of year three.
The shares held by qualifying institutional investors will not count toward those shares held by five or fewer investors for the purposes of the close test. Qualifying institutional investors include charities, registered providers of social housing, sovereign wealth funds, pension funds, managers/trustees of authorised unit trusts and OEICs, certain investment partnerships, REITs and overseas equivalents of UK REITs.
Special provisions apply wherea corporate shareholder owns 10% or more of the economic or voting rights in a REIT, which in practice limits the ability of non-UK corporate shareholders to access reduced dividend withholding tax under double tax treaties. A UK REIT is penalised if it makes distributions to such a shareholder (including a UK resident corporate shareholder). To prevent such penalties arising UK REITs can amend their articles of association to prevent payments of such dividends.
Restrictions on non-resident investors?
There are no restrictions specifically applicable to non-resident investors.
Asset/income/financing/activity tests
It is possible for a UK REIT to have both a property rental business and other activities. At least 75% of profits and 75% of the total value of assets must relate to the property rental business. For the purpose of the assets test, cash (and certain cash equivalents, e.g. gilts) is a good asset following FA 2012.
Such tests are carried out by consolidating the results of each company in the group as set out in financial statements produced using International Financial Reporting Standards (IFRS) with adjustments for non-recurring or distortive items, e.g. movement on hedging, one-off transactions, etc.
There must be at least three properties with no one “property” accounting for more than 40% of the value of the REIT assets.
There are financing requirements. Any loans to the UK REIT should be on normal commercial terms and not provide for an interest rate that increases with improved performance (disguised dividend).
Additionally, there are ongoing requirements in respect of the profit financing ratio. The REIT must have a profit financing ratio where the profits are at least 1.25 times the finance costs. ‘Finance costs’ for the purposes of this test used to include all debt costs including swap break costs. Following several amendments finance costs are now limited to interest, and amortisation of discounts relating to financing. There is an exemption where the REIT is suffering unexpected financial difficulties. A tax charge is levied on the REIT where there is excess interest (subject to relief under the hardship provisions).
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