Amendments to the UK REIT rules

Changes to the UK REIT regime have been published as part of the draft legislation for Finance Bill 2022.

Changes to the UK REIT regime have been published as part of the draft legislation for....

Following the consultation on the tax treatment of asset holding companies, changes to the UK Real Estate Investment Trust (REIT) regime have been announced that propose to make amendments to the tax rules applying to UK REITs including some of the conditions that determine whether a company qualifies to be a UK REIT. The proposed measures take effect from 1 April 2022 and aim to alleviate constraints and administrative burdens where they are no longer necessary and enhance the attractiveness of the UK REIT regime, particularly for institutional investors. This will impact existing UK REITs, those investing in UK REITs and those considering converting or investing in UK REITs in the near future.

The proposed amendments include removal of the listing requirement in certain cases, an amended definition of an overseas equivalent of a UK REIT, removal of the ‘holder of excessive rights’ charge to corporation tax for certain investors, changes to the balance of business test and removal of the requirement to supply financial statements for each member in certain cases.

Listing requirement

The listing requirement for shares to be admitted to trading on a recognised stock exchange has been removed for REITs where institutional investors hold at least 99 percent of the ordinary share capital of the REIT (the listing requirement would still apply to all other REITs). Institutional investors for this purpose follows the existing definition used for the purposes of the REIT ‘non-close’ test. Where the institutional investor concerned is a person acting on behalf of a limited partnership which is a collective investment scheme, the scheme must meet the general diversity of ownership (GDO) requirement for this purpose.

This change should encourage more investment into UK REITs as the compliance burden and cost associated with listing is often a key factor in investors’ appraisal of suitable investment vehicles.

Overseas equivalent of a UK REIT

The definition of an overseas equivalent of a UK REIT (part of the list of defined institutional investors for REIT purposes) has been changed from the overseas entity being a resident of a jurisdiction that has a law equivalent to the UK’s REIT regime to the overseas entity itself being equivalent to a UK REIT in terms of its broad characteristics.

The previous definition was such that the rule referred to the overseas regime being equivalent, rather than the overseas entity. This amendment is a welcome change as it removes the onerous compliance burden for overseas REITs in seeking to demonstrate that they meet all of the detailed UK REIT conditions in addition to the conditions of their own REIT regime.

Balance of business test

A ‘gateway test’ in the form of a new simplified balance of business test is introduced so that, if a group’s consolidated accounts for a period show that property rental business profits and assets comprise at least 80 percent of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test.

Further, non-rental profits from activities undertaken to comply with certain planning obligations can be disregarded for the balance of business test.

Holders of excessive rights charge

The ‘holders of excessive rights’ (HoER) rule protects the UK Exchequer from loss of tax on property income distributions (PIDs) paid to non-resident corporate entities. The definition of HoER has been changed so that investors in UK REITs who are entitled to payment of PIDs without tax being deducted, such as UK companies, will not be treated as HoER, and consequently no charge would arise in respect of PIDs paid to such persons.

This removes the need for such shareholders to create complicated and costly structures solely to remain under the 10 percent limit.

Investors to whom PIDs are paid after deduction of withholding tax but who may subsequently be entitled to a repayment of that tax because of their status (for example sovereign immune entities) will however, have to continue to reclaim the withholding tax suffered on PIDs.