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Draft Finance Bill 2022: REITs

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The newly-announced changes to the REITs regime will be welcomed by the industry. Most are aimed at lowering costs or administrative hurdles, and none of the changes are aimed at creating any waves or ripples in the regime. That’s not to say that the changes are not needed or wanted, especially in light of the chancellor’s announcement this year that the UK corporation tax is set to rise to 25% in 2023. Non-UK investors prepared to claim treaty relief are also increasingly aware of the potential benefit that REITs provide by way of a much lower effective UK tax rate, which is reduced to nil for pension investors in a number of jurisdictions. 

The removal of the requirement to list the shares of a REIT on a recognised stock exchange will be very helpful to fund managers launching specialist institutional REITs, such as the recently-launched social housing funds. Not only will it materially reduce the launch and running costs, making smaller funds viable, but it will also speed up the time it takes to launch them by several weeks. 

The removal of the ‘holders of excessive rights’ penalty charge where property income distributions (PIDs) are paid to investors entitled to receive them gross is also a very welcome change. It will be helpful to the industry as it will enable UK companies, and, in particular, UK life companies to seed new REITs and to invest more substantial amounts on capital raises. Operationally, it will also be helpful for fund managers, particularly those using a REIT in an open-ended structure, not to have to try and track the size of each corporate investor’s holding. It would be very helpful to authorised fund managers of property authorised investment funds (PAIFs) if they should extend this to them, by way of maintaining a level playing ground between the two types of UK property fund. 

While it should be easier for fund managers to test whether an overseas fund is equivalent to a UK REIT by considering the fund in question rather than having to consider its local tax regime, it would be particularly useful if they could relax the equivalence test at the same time to include overseas REITs formed as unit trusts. 

These encouraging changes form part of HMRC’s wider review of the UK funds regime and sit alongside HMRC’s response to the consultation on the tax treatment of asset holding companies which was released at the same time.

The changes are intended to enhance the attractiveness of the UK REIT regime for real estate investment and they definitely do that. We expect that they’ll result in an increasing number of closed-ended institutional UK property funds being formed in future as private REITs rather than in partnership form.
Issue: 1542
Categories: In brief