Shares in UK Real Estate Investment Trusts (UK-REITs) will be eligible to be held in Individual Savings Accounts (Isas), Personal Equity Plans (Peps), and Child Trust Fund accounts (CTFs) according to draft legislation consultation documents published by the Government.
The consultation documents released by Her Majesty’s Revenue and Customs (HMRC) set out the draft legislation as it would apply to a single company, and include the key features and rules companies would be required to meet in order to join the UK-REIT regime. HMRC say details of how legislation will apply to group structures will be published shortly.
UK companies which are publicly listed on a recognised stock exchange will be allowed to become a UK-REIT, providing no person controls 10% or more of the company's ordinary share capital or voting rights. Meanwhile, for tax purposes, the ownership of the property will be separated from the activities that take place there by establishing a ring-fence around the qualifying property letting business of the UK-REIT.
Although the regime would allow companies to carry out activity within the non ring-fenced part of the business, including income generated from additional services associated with property letting and development, the majority, at least 75%, of the UK-REITs activity must relate to the ring-fenced business in relation to both its total income and assets.
Under the tax regime for the UK-REIT, scheduled for introduction from January 1 2007, the consultation document says the “Government is minded that shares in UK-REITs shall be eligible to be held in an ISA, Pep or CTF subject to existing limits and rules”.
A UK-REIT will be required to distribute at least 95% of its net taxable ring-fenced profits to investors who will then pay tax at their marginal rate. The regime will also be required to withhold basic rate tax on the distribution paid to investors on behalf of the HMRC.
The consultation, which ends on January 27 2006, also reveals companies will be subject to an entry charge, although the rate and mechanism for the charge applying to join will not be announced until the 2006 budget, when final legislation will also be revealed ready for inclusion in the 2006 Finance Bill.
However the draft legislation also includes a small amount of flexibility around the issue of an interest cover test which will be imposed on companies joining the UK-REITs scheme. If a company fails the test they will not be excluded from the regime, but will be penalised by an additional tax charge that will be detailed in the final regulations.
Adrian Boulding, pensions strategy director at Legal and General, says: "Reits is looking like a very attractive inestment opportunity for a self-invested personal pension, with all the benefits of diversification that individual property purchase is obviously missing, and I am expecting taht a pension fund will be able to invest in a REIT in the future"
Rachel Vahey, pensions development manager at Scottish Equitable says the publication of the documents is the next step in the whole process of bringing REITs into the savings market, and that it gives a clearer picture of how the vehicles will work, although some key details, such as the conversion charge, are still missing.
She adds: “We welcome REITs as an alternative savings scheme and anything that broadens and diversifies the investment options has to be a positive step. However we were surprised that where the document mentions the eligibility of ISAs, PEPs and CTFs, it doesn’t specifically mention pensions as it would have been an interesting option for those who may have been planning to invest in property through their Sipp. We were very surprised it wasn’t mentioned.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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