Plans to remove barriers to entry into REITs scheme proposed in Finance Bill

Proposed changes to the REITs scheme were laid out in the Government's draft Finance Bill 2012. REITs are tax-efficient property investment companies. They were first developed in the US but were introduced in the UK in 2007.

Under the planned changes the 'entry charge' that companies must pay for joining the REITs scheme would be scrapped. Currently companies are charged 2% of the gross market value of properties involved in the tax-exempt business.

Companies will also be able to operate in the REITs scheme when listed on non-regulated stock exchanges, such as the Alternative Investments Market (AIM), following a relaxation of rules on company listings. Currently one of the conditions of being a REITs company is that companies must be members of at least one certain "recognised stock exchange". The conditions are laid out in the Corporation Tax Act 2010.

Another condition companies must satisfy in order to qualify for the REITs regime is that they must not be a "close company". This broadly means a company with fiver or fewer controlling parties. Under the draft legislative changes a company that registers as a REIT would have three years in which to meet this requirement.

If the close company rules are not met by the end of this period for legitimate reasons then the company will lose its REIT status without any further penalty. However, existing laws may be invoked where the company is deemed to have joined the regime in order to gain a tax advantage.

Further changes have been proposed to make investment easier for institutional investors and also allow cash to be a 'good' asset for the purpose of meeting the balance of business asset test. Currently REITs companies must prove they are primarily a property investment company by having at least 75% of total profits and assets related to its property rental business.

In a joint publication the Treasury and Her Majesty's Revenue and Customs (HMRC) said the changes were designed to "support expansion of the property sector and so encourage further investment and stimulate the construction industry." The draft measures are open to consultation until 10 February 2012.

In the Budget earlier this year the Treasury promised to remove barriers to entry to the REITs regime in the Finance Bill, subject to consultation with the property industry. In October the Treasury confirmed in a letter to some of those involved in the informal consultation, that the changes would be introduced.

Property tax law expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the draft legislation missed an opportunity to allow banks and other financial services firms to control REITS.

"The new rules allow certain financial institutions to control REITs," he said. "These include pension schemes, authorised funds and life companies, but banks or private equity institutions are not allowed to control a REIT. This is not unexpected, but it does miss an opportunity for REITs to be used as a vehicle to unlock some of the property exposure of the banking sector."