REITs at a glance
A Real Estate Investment Trust (REIT) can be either a single-company or group REIT that owns and manages property on behalf of shareholders. REITs may contain commercial and/or residential property but not owner-occupied buildings. REITs provide a way for investors to access the risks and rewards of holding property assets without having to buy the property directly.
In the UK, a company or group of companies can apply for UK REIT status, which provides exemption from corporation tax on profits and gains from their UK-qualified property rental businesses. In return, UK REITs are required to distribute at least 90% of their taxable income for each accounting period to investors, where the income is treated as property rental income rather than dividends. In this way, taxation of income from property moves from the corporate to the investor level.
What are the benefits of REITs?
UK REITs provide a range of important benefits to companies and investors. And because UK REITs are listed on the Main Market or AIM they also enjoy all the other benefits associated with London's equity markets.
Benefits for companies:
- Tax efficient structure
- Access to new investors/capital
- Performance more closely aligned to net asset value (NAV)
- Acquisition currency.
Benefits for investors:
- Tax transparent
- Potentially high-yield returns
- Access to property for minimal outlay
- Low/controlled gearing
- Portfolio diversification (low correlation to equities and bonds)
- Liquid asset
- Strong corporate governance.
How to qualify
There are a number of qualifying conditions that a company needs to meet in order to become a UK REIT. These qualifying conditions, as determined by HMRC, fall into three categories: company conditions, property rental business conditions and balance of business conditions. In particular, a potential UK REIT has to carry out a property rental business which can be a UK property investment business or an overseas property investment business. At least 75% of the group’s profits must derive from that property rental business and at least 75% of the group’s gross assets must comprise assets or cash involved in the property rental business. Further details of the conditions required to be met to enter, and remain within, the UK REIT regime can be found on the HMRC website.
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