UK real estate has a significant history of attracting investment as an alternative asset class for institutional investors including pension funds, insurance companies, sovereign wealth funds and private equity for investors based in the UK and internationally.
UK REIT Regime
The UK REIT regime was launched on 1 January 2007 to encourage investment in the UK real estate sector. REITs are globally recognised tax efficient structures for investment in real estate and are important and popular structures utilised by various leading real estate companies.
The principal attraction of the UK regime is that a REIT is not liable to pay UK corporation or capital gains tax on the profits (including rental income) arising from its property investments.
REITs are exempt from the free-float rule requiring 25% of the issued share capital to be held in public hands, which has proved particularly attractive to REITs where there are a smaller number of institutional investors, especially, long term investments that don’t require significant levels of liquidity. However, there has been a recent trend towards TISE also proving attractive to more widely held REITs and those who want the option to trade through TISE’s bespoke trading system.
Using a Jersey company to avail of the UK REIT regime has the following advantages, compared to a UK equivalent:
- Companies (Jersey) Law 1991 allows distributions to be made on a cash flow solvency basis;
- No stamp duty is payable on the transfer of shares in a Jersey company, which is particularly relevant on entry and exit; and
- Companies (Jersey) Law 1991 also recognises protected and incorporated cell companies that may be useful for ring-fencing REIT assets and liabilities within underlying subsidiaries.
What is a UK REIT?
A real estate investment business that meets eligibility criteria set out by HMRC:
- Must be a company – as of 26 May 2020, of the UK REITs which are admitted to listing on TISE, almost 50% are companies incorporated in Jersey but managed and controlled in the UK.
- Must be a UK tax resident – company must be centrally managed and controlled and resident for tax purposes in the UK, i.e. majority of the board being comprised of UK residents and board decisions being taken in the UK.
- Must be listed on a recognised stock exchange or traded on such an exchange for every accounting period – TISE is a recognised stock exchange and listing venue by HMRC under section 1005 of the Income Tax Act (2007) and is home to a third of all UK REITs thanks to its pragmatic listing requirements for this product and relative cost-effectiveness.
- Must not be a close company or, must be a close company only because it has one or more participator ‘institutional investors’ (e.g. a person acting on behalf of a limited partnership that is a collective investment scheme, UK or overseas pension schemes, REITs, life insurance business, open-ended investment companies, authorised unit trust schemes, certain charities or sovereign immunity investors).
- Must not be an open-ended investment company and the REIT may only have in issue a single class of ordinary share capital and various classes of relevant preference shares (common structure for Jersey companies, which in this context may operate exactly like a UK company).
- Must not be party to any profit participating and other types of prohibited loans.
- Must focus on Real Estate – 75% of the REIT’s activities by reference to income and asset values must relate to property investment business.
- Must distribute 90% of the income of its property rental business as property income dividends for the profits of the business to be exempt from tax. There is no requirement for the company to distribute any gains on disposal of properties that are part of the business. The 90% distribution requirement may be satisfied by using stock/share dividends.
REITs are attractive to investors due to:
- Easier access to property investment versus purchasing a property directly;
- Indirect investment into property through a tradable investment asset, versus direct (illiquid) investment into property;
- Diversity of investments across a range of property assets;
- Access to areas of the property sector usually only accessible to private investors;
- Regular and stable income stream;
- Lower transaction costs compared to purchasing property directly i.e. up to 0.5% stamp duty on shares compared to up to 5% stamp duty land tax on commercial property;
- Improved after-tax returns for shareholders as profits are generally only taxed at the shareholder level; and
- Tax benefits, including exemption from corporation tax on rental income and capital gains, and a tax rebasing of the properties used for the rental business to market value on entry to the REIT regime.
TISE Listing Requirements can be found on its website
Continuing Obligations of a TISE listed REIT
- TISE’s market authority carries out risk assessments and reviews of all issuers and conducts surveillance to maintain market integrity.
- There is a requirement to notify TISE, the market and the holder of listed securities of certain information, which includes: market data; routine changes to offering documentation; intended corporate actions; AGM/EGM notices and resolutions annual and interim accounts; changes related to directors; and changes related to auditors and advisers.
Written by Carol Ann Rotsey, Executive Director, London
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The material contained in this article is provided for general information purposes only and does not constitute tax, legal or other professional advice. Whilst every care has been taken in the preparation of the content, specific legal and tax advice should be taken to confirm the precise requirements and ensure that the proposed structure complies with the applicable REIT regulations and guidance and to obtain all necessary clearances and confirmations from HMRC prior to implementation.