A UK REIT comprises of a company that carries on a property investment business in which properties are let to tenants. UK REITs benefit from an exemption from UK tax on both rental income and gains relating to their property investment business. On an on-going basis, the REIT business has to meet certain tests as well as being required to distribute 90 per cent of its rental income in respect of each accounting period in order to obtain exemption from tax on its rental income. The requirements to qualify for REIT status include tests such as those listed below.
REIT setup requirements – the balance of assets test:
- At least 75 per cent of the UK REITs gross assets must be used in the rental business and at least 75 per cent of the UK REITs profits must be earned in its qualifying rental business.
- Members of a UK REIT may have other activities. Such activities must not involve more than 25 per cent of the UK REITs gross assets, nor generate profits of more than 25 per cent. Such tests are carried out using the consolidated group results as set out in financial statements produced using International Financial Reporting Standards (IFRS) with adjustments for non- recurring or distortive items, e.g. movement on hedging, one-off transactions.
- Only rental profits and gains realised on the disposal of properties used in the UK property rental business will be exempt from tax.
- There must be at least three properties with no one property accounting for more than 40 per cent of the value of the REIT assets (note, a single property which is multi-tenanted such as a shopping centre will count as more than one asset).
- Property development by the UK REIT for investment on its own account is permitted, and is generally included within the property rental business unless development costs exceed 30 per cent of the acquisition cost (or the property’s value at the time of entry to the REIT regime if higher) and the property is sold within 3 years of completion.
- Property trading is permitted but is taxable, and falls outside of the property rental business for the purpose of the balance of business restrictions.
- There are no restrictions on foreign assets, the UK REITs may invest outside the UK in real estate wherever located.
This link below provides a summary of the UK REIT Regime below is intended to be a general guide only and constitute a high-level summary of the Company’s understanding of certain aspects of current UK law and HMRC practice relating to the UK REIT Regime, each of which is subject to change, possibly with retrospective effect. It is not an exhaustive summary of all applicable legislation in relation to the REIT Regime. The UK REIT Regime was introduced by the UK Finance Act 2006 and subsequently re-written into Part 12 of the CTA 2010.
For more detailed information please visit the HMRC REIT Manual