Asset Classes 6 - Property (indirect)

Question 1

What is the main advantage of investing in property company shares?

Answer 1

liquidity

Question 2

What are the restrictions on UTs and OEICs investing in property?

Answer 2

• Restrictions on the proportion of the fund that can be invested in leases with less than 60 years to run, or in unoccupied property.
• Gearing restricting on mortgaged property t
• No more than 15% of the fund’s total value may be invested in a single property.

Question 3

How much CGT do UTs and OEICs pay?

Answer 3

• There is no CGT charged to the fund
• Investors may be subject to CGT on gains when they sell the units or shares, and losses are allowable.

Question 4

How is income taxed for property investments in UTs and OEICs pay?

Answer 4

They pay corporation tax on their income

Question 5

What are Property Authorised Investment Funds (PAIFs) and how are they taxed?

Answer 5

Property authorised investment funds (PAIFs) invest mainly in property, including REITs, and can elect for a special form of tax treatment.

Under the PAIF regime:

• Rental profits and other related income is exempt from tax in the fund and is distributed to eligible investors gross, without tax deducted (called a non-property income distribution, or non-PID).
• Property income is ring-fenced within the fund and all other taxable income is charged to corporation tax at 20% (called a property income distribution, or PID).

Distributions to investors are split into three categories of income: property income, other taxable income (bank interest and non-UK dividends), and UK dividend income.

Question 6

What are the qualifying conditions for PAIFs?

Answer 6

• the fund must be structured as an OEIC
• at least 60% of the net income of the PAIF must be from the exempt property investment business
• the value of the assets involved in the property investment business must be at least 60% of the total assets held by the PAIF, and
• the shares of the PAIF must be widely held, and no corporate investor must hold 10% or more of the NAV of the fund.

Question 7

Can REITs use leverage?

Answer 7

Yes

Question 8

How are REITs taxed in the fund?

Answer 8

Benefit from exemptions from corporation tax on property-related income and CGT on gains, providing that they meet certain conditions

Question 9

What are the qualifying requirements for REITs?

Answer 9

• UK residency and listed on LSE
• Fully transferable share with at least 100 shareholders
• 90% of profits distributed to shareholders each year as dividends
• 75% of total investments must be in real estate
• no single shareholder may hold 10% or more of the share capital or voting rights
• the value of any one property should not exceed 40% of the total value of investment properties
• at least 75% of the income must be rental income, and
• the ratio of interest paid on borrowings to fund the tax-exempt business to its rental income should not exceed 1.25:1.

Question 10

What tax do investors pay on REITs?

Answer 10

Investors pay tax on dividends and any capital growth from their REIT investments at their marginal tax rates.

Question 11

What are the characteristics and tax treatment of Life Assurance Property Bonds?

Answer 11

• A life fund is not permitted to borrow.
• Income and capital gains are subject to tax within the fund at 20%. This cannot be reclaimed by nontaxpayers, and both higher rate and additional rate taxpayers will pay further tax