About UK REITs
Real Estate Investment Trusts (REITs) are tax-exempt, listed property investment companies or groups not liable to corporation tax on their rental income or capital gains from their qualifying activities.
The UK has had a tax exempt real estate regime since 1 January 2007. A number of other countries, notably the US, Australia and France also have tax exempt REIT regimes. British Land has been a REIT since 1 January 2007.
Investment companies and groups can elect to become a REIT: it is an optional regime. On entry to the UK regime, a REIT is required to pay 2% of the market value of its investment properties to HM Revenue & Customs (HMRC). Qualifying REIT companies:
- Must meet certain conditions including minimum levels of interest cover and the proportion of total profits and assets that relate to their property rental businesses
- Do not pay UK corporation tax on profits and gains from their UK qualifying property rental business
- Are required to distribute to shareholders at least 90% of the profits arising from the tax-exempt business as Property Income Distributions (PIDs), normally within one year of the end of the accounting period concerned
- Are not required to distribute tax-exempt capital gains on the sale of investment properties but may do so if they choose (Non-PIDs)
- Remain liable to corporation tax on non-property investment businesses including rent or profits on the sale of trading properties (ie held for less than 3 years)
Property Income Distributions (PIDs)
The tax-exempt profits REITs are required to distribute are not necessarily equivalent to their accounting profits. HMRC requires various adjustments to be made including for tax deductible allowances on qualifying capital spend.
Profits distributed as PIDs are tax exempt and therefore are potentially fully taxable in shareholders hands as property letting income. PIDs are normally paid out after deduction of basic rate tax at source, which the REIT pays to HMRC on behalf of the shareholder. Certain types of shareholder are tax exempt and receive PIDs without withholding tax.
Forms for claiming exemption from withholding tax on PID dividend payments are provided:
Read further information on dividends
