A Real Estate Investment Trust (REIT) despite its name is just a normal UK company that elects into a special tax regime, if it qualifies, which makes it exempt from tax on property investment profits and gains. It is not a trust at all. REITs are a relatively new concept in the UK having been introduced in the Finance Act 2006 and further legislated in the Corporation Tax Act 2010. However, they are very well established in the US with their origins dating back to 1960 when President Eisenhower signed them into legislation.
To qualify for the REIT regime there are numerous conditions to be fulfilled:
- The company must be tax resident in the UK and nowhere else
- It must not be an Open-Ended Investment Company (OEIC)
- It must not be a ‘close company’
- Only one class of ordinary share capital (Non-voting restricted preference shares are allowed)
- Shares must be admitted to trading on a ‘recognised stock exchange’
- No non-commercial loans
The REIT must distribute:
- 90% of the rental profits must be distributed
- 100% of distributions from other REIT’s must be distributed
- Within 12 months of the end of each accounting period
- By way of cash dividend or shares in lieu of cash
The key purpose of a REIT is to shift the burden of taxation from the company itself to the shareholders which is great for tax-exempt investors such as pension funds.
A major attraction of REITs for pension fund investors is that they are one of a number of vehicles that allow investment into residential property through an exemption from HMRC which opens up a world of opportunity.