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?

type of property, gearing and concentration

Answer 2

• Restrictions % of investment in leases <60 years to run & unoccupied property.
• Gearing restricting on mortgaged property
• No more than 15% of the fund’s total value may be invested in a single property.

Question 3

How are the funds in and the investors of UTs and OEICs treated for CHT?

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

• structured as an OEIC
• > 60% of the net income must be from the exempt property investment business
• property assets > 60% total assets
• shares of the PAIF widely held (no corporate investor >10%)

Question 7

Can REITs use leverage?

Answer 7

Yes

Question 8

How are REITs taxed in the fund?

Answer 8

Exempt 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?

8 requirements

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?

leverage and tax tates

Answer 11

• Funds 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)

Question 12

Can property funds delay redemptions?

Answer 12

Yes for up to 6 months if necessary to allow them time to sell property if needed.

Question 13

What are the tax benefits of PAIFs?

Answer 13

• They are able to elect for special tax treatment moving the taxation point on to the investor for all rental profits and related income.
• No tax deducted at source

Question 14

How are REITs taxed when they develop property?

Answer 14

Gains will usually be taxed under Corporation Tax unless the property is completed and then held for a further 36 months.