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Treasury responds to informal consultation on REITS

Proposed changes to the real estate investment trusts (REITs) scheme will make it easier for companies in the residential housing sector to obtain tax-efficient status, the Government has said.14 Oct 2011

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

REITs are tax-efficient property investment companies. They were first developed in the US but were introduced in the UK in 2007.

The Government said the changes would "support good business practices and remove barriers to entry, and investment in, the REITs regime".

The changes include removing the 'entry charge' of 2% of the gross market value of properties involved in the tax-exempt business which applies when a company first elects to join the scheme.

The company listings requirements will also be relaxed to allow listing on non-regulated stock exchanges, including the Alternative Investments Market (AIM).

In order to qualify for the REITs regime the company must not be a close company - broadly speaking, one with five or fewer controlling parties. The Treasury has clarified that a company which registers as a REIT will have a grace period of 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 will be introduced which will make investment easier for institutional investors and allow cash to be a 'good' asset for the purpose of meeting the balance of business asset test. Detailed provisions will be available for technical comment when the draft legislation is published, the Treasury said.

"The Treasury response is positive although it only covers the areas already announced in the Budget. More changes will be needed addressing the specific issues applying to residential REITs if the Government is to bring REIT investment into social housing and residential," said John Christian, a property tax law expert with Pinsent Masons, the law firm behind

A spokesman for the Treasury told that more information would be available when the draft Finance Bill was published on 6 December 2011.