To REIT, or not to REIT, that is the question

Some might say that certain parts of the UK tax code can be likened to a Shakespeare soliloquy – long, difficult to wade through, and hard to comprehend but somewhat rewarding when you reach the end with at least a partial understanding of what you have just read.  And like any Shakespeare text, it is the Collins crib notes – or in our case HMRC guidance - that really give you a greater understanding of what the author intended. Whilst HMRC’s changes to the REIT legislation in Finance Act 2022 have been welcome, interpretation of the legislation has still been open to debate with ambiguity remaining. HMRC’s recent updates to the REIT guidance in the Investment Funds Manual are therefore certainly welcome.

With a widening of some of the REIT-entry conditions over recent years, and the increase in the UK corporation tax rate to 25%, private REITs are becoming a more popular vehicle for holding UK real estate portfolios. Very broadly, UK REITs benefit from a UK corporation tax exemption on qualifying property rental business profits with distributions from a REIT instead subject to a baseline 20% withholding tax. In some cases, investors can utilise a UK REIT to create a fully tax-exempt holding structure, whilst in other cases, the effective tax rate can be substantially reduced using double-tax treaties. Whilst the benefits of a REIT are clear, creating a UK REIT is rarely a single-step process, and significant time must be invested in reviewing the entry-conditions to ensure that a REIT structure is possible in the relevant circumstances.

In mid-April, HMRC released updates to its REIT guidance. Although many of these updates merely reflect the provisions of recent Finance Acts, HMRC has now included examples of its interpretation of the legislation in a number of places – such examples are particularly useful to the reader. Whilst a guiding principle of the REIT is that it should be widely held, the updated guidance confirms it is possible to create a private REIT with a single shareholder, where that shareholder itself is “widely held”. Therefore, where an institutional investor is a direct or indirect participator in a REIT, there is no need to “look behind” that institutional investor for the purposes of the “non-close condition”. These statements are particularly helpful where the institutional investor is a transparent entity – such as a collective investment scheme limited partnership (CIS LP). In such a case, the status of the limited partners in the CIS LP are irrelevant.

As the popularity of UK REITs increase, HMRC may see an influx of wider questions on uncertainties in the REIT legislation, and so we may see further clarificatory guidance introduced in the not-too-distant future – quite like the continued publication of explanatory notes to Shakespearean plays.

If you are considering a REIT or would like any further information, please do be in touch.