An Analysis of the Real Estate Investment Trust in The United Kingdom

Content

Introduction

What Is Reit?

Background Information
The Pre Uk Reit Dialog

Current Situation
Taxes

Advantages And Disadvantages Of Reit

Future Developments

Real Life Examples And Case Studies

Bibliography
Internet Source:
List Of Figures:

INTRODUCTION

The REIT system, in combination with London's strong and traditional capital markets, has given the property investment sector the opportunity to grow. The law to set and preserve the identity of REITs in the United Kingdom was enacted in January 2007 and soon after that several property groups changed to REITs as well as some start-up REITs developed. Basically Real Estate Investment Trusts allow property companies to take part in the equity markets and thus provide financial means to end-investors without any tax leakage. Therefore UK-REITs offer further asset classes to investors and shareholders.^[1]

WHAT IS REIT?

REIT, which stands for Real Estate Investment Trust, deals with real estate as its asset. Therefore someone could assume that REIT was to be an equivalent alternative to direct property investment.

Instead trade as equities follows other market mechanism than the cumbrous direct property market does. Trading on equities may change the character of REITs as investments, which comes apparent in the volatilities of direct real estates and REITs. The question arises whether REITs is to be seen as an investment in real estate or in equities or if it represents a hybrid form of both characteristics. Are REITs belonging to the real estate allocation or are they part of the equity allocation? A recent study reveals that 35% of US investors acknowledge REITs as an element of real estate business, while 37,5% favour them to be part of the equity section. Because the answer to this relevant question is very vague and undecided, it could explain why institutions still only take gentle steps towards the REIT market.^[2]

Despite all arguments, we can list some clear facts for REITs in the United Kingdom:

- A Real Estate Investment Trust is a single firm or a group of business corporations of REITs that owns or runs real estate on behalf of shareholders.
- In spite of their closeness to the direct real estate market, REITs do not hire properties.
- Investors can participate in the real estate business without really buying land or buildings.
- If a company or a group of company gains the UK-REIT status, it is automatically exempted from taxes on profits concerning the property rental business.
- On the other hand UK-REITs have to give away 90% of their taxable income to investors. In this way the payment of taxes for property income is shifted from a corporate level to an investing level.^[3]
- A group REIT consists of the principal company and of it 75% subsidiaries.^[4]

A Real Estate Investment Trust allows investors to receive returns from their investments, similarly as if they would have obtained assets from investing directly in property.

The performer is a company or a group of companies, that are required to invest in real estate and to hand over 90% of their profits gaining from their property rental business as dividends to the shareholders instead of taxes. Once the dividends are moved on to the shareholders, they get taxable at their marginal rate as profits descending from the UK property business. “Gains on disposal of shares in the REIT are chargeable to tax under the normal rules for disposing of shares.”^[5] The vehicle, as for the company, is exempt from taxation on the earnings of its property rental business, but it has to pay a Corporation Tax at the currently highest rate of 28% on the gains and incomes concerning any other activities of the company.^[6]

The taxation of investors in a UK REIT will be explained as follows. A dividend that is obtained from property related profits, which means rents or capital gains, is^[7]:

- Paid gross to a UK company and taxed as if it were a receipt of rent;
- Paid gross to certain classes of tax exempt shareholders e.g. charities and UK pension funds, who will suffer no further tax;
- Subject to basic rate income tax at source (currently 20%) if paid to a UK individual. The gross dividend received is subject to tax as if it was a receipt of rent but the income tax already suffered may be credited against this or repaid if it exceeds the individual’s tax liability;
- Subject to basic rate income tax at source if paid to an overseas shareholder (corporate or individual) who may then be entitled to make a claim to HM Revenue & Customs for repayment of some or all of this amount depending on the terms of the relevant tax treaty with the UK.^[8]

Abbildung in dieser Leseprobe nicht enthalten

Fig. 1: http://www.bpf.org.uk

[...]

^[1] cf. www.londonstockexchange.com

^[2] cf. “Real Estate Investment Trusts: The US Experience and Lessons for the UK”, p. 31

^[3] cf. www.londonstockexchange.com

^[4] cf. “Deloitte. Real Estate. UK Reits. A summary of the regime”, p. 3

^[5] www.bpf.org.uk

^[6] cf. www.bpf.org.uk

^[7] cf. “UK Real Estate Investment Trusts. At a glance”, p. 2

^[8] Ibid.

^[9] cf. “Real Estate Investment Trusts: The US Experience and Lessons for the UK”, p. 31