UK Real Estate Investment Trusts will have to pay an "entry charge" worth 2% of the market value of their investment properties before they are allowed to proceed under the Reit regime set to take effect 1 January 2007, announced by HMRC today.
The charge is to be paid alongside any corporation tax in the first accounting period the regime applies although it can be spread across the first four years of operation in instalments of 0.5%, 0.53%, 0.56% and 0.6%.
The Reits will be exempt from corporation tax on qualifying rental income and disposals of investment properties, although profits and gains on other activities will be subject to the tax.
HMRC Budget Note 03 which identifies the charge also outlines the proposals that Reits listed on a “recognised stock exchange” must hold 75% of assets in investment property, and derive at least 75% of income from rental income.
No investor can hold more than 10% of the share capital or voting rights, or be entitled to more than 10% of distributions.
Distributions must amount to at least 90% of tax-exempt profits each year, which means UK Reits must be UK resident for tax purposes.
Distributions, or dividends, will be taxed under provisions of the Income and Corporation Tax Act 1988 and the Income Tax Trading and Other Income Act 2005, with dividend payments subject to basic rate income tax of 22%.
Dividends paid out of other profits are treated as normal dividends for UK tax purposes.
“For many investors there is not further tax to pay on the dividends. This is because UK companies are in general exempt from tax on UK dividends and for individuals the tax credit attached to the dividend meets the liability to tax for all but higher rate taxpayers. Higher rate taxpayers pay additional tax of 25% on the dividend. The tax credit cannot be paid to investors whose liability to UK tax is less than the tax credit.”
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 Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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