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Relaxation of corporation tax rules for REITs will benefit UK property industry, says expert

The property industry in the UK would benefit if real estate investment trusts (REITs) no longer had to pay corporation tax on the income they derive from investing in other REITs, an expert has said.19 Nov 2012

A report (subscription only) by the Financial Times has suggested that the Government is set to relax the tax rules relating to REITs investing in other REITs having consulted (35-page / 362KB PDF) on the issue earlier this year.

Under the changes REITs, which are tax-efficient property investment companies, would be exempt from paying corporation tax on income they derive from having invested in other REITs schemes, according to the newspaper. Currently the income generated in such circumstances is treated as "income from property" on which the main rate of corporation tax has to be paid by the firms.

Tax law specialist John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the UK tax regime for REITs would move more in step with other countries' if the Government did bring in the reforms.

"The changes will be very welcome for the property industry and remove an important barrier to the efficient working of the REIT regime," Christian said. "The changes will open the way for joint ventures to be structured as REITs and will pave the way for more collaborations between REITs and institutional investors."

"We will also see the launch of smaller, more specialised REITs which the larger REITs will be able to invest into. This is an important step on the long road to create a UK REIT regime which will have the success and liquidity of REITs in other countries," he added.

The Treasury held a near-two month consultation on proposals to exempt REITs from paying corporation tax on income generated from investing in other REITs from early April until late June this year.

In its consultation the Treasury admitted the proposals would amount to a "fundamental change to policy". This is because it would "mean moving away from limiting REIT activity to direct investment in bricks and mortar".

"It would not only change the tax suffered by investors in REITs that invest in other REITs but also facilitate greater investment diversification as they are able to take a stake in a wider investment pool," the Treasury said when justifying its proposed change to the rules.

Chancellor George Osborne could officially announce the REITs tax treatment reform plans during his Autumn statement on 5 December, the Financial Times reported.

REITs were first developed in the US but were introduced in the UK in 2007. Other changes relating to the tax treatment of REITs were outlined late last year as part of the draft Finance Bill.

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Expertise in Real Estate Tax

Property transactions present a large number of complex taxation issues whether those involved are property owners, developers, tenants, banks, investors or the public sector. Tax charges can significantly affect the return and, in some cases, can make a project commercially non-viable.

More about Real Estate Tax