property based investments

Question 1

Shares in Listed Property Companies

Answer 1

More liquid than direct investment
Investment diversified over a number of properties
Can be highly geared
Prices affected by quality of management and borrowing levels

Question 2

Property Unit Trust and Investment Trusts

Answer 2

Authorised unit trusts can invest in shares of property companies or invest directly
Investment trusts invest primarily in the shares of property companies and can only hold a small percentage in direct property
Unit trusts cannot borrow money as easily to invest
Unit trust price linked to value of investments
Investment trust share price moves according to demand - independent of NAV

Question 3

Property Authorised Investment Funds (PAIFs)

Answer 3

Elect for tax treatment to move point of taxation from fund to investor
Rental profits and other property related income is exempt from tax within the fund Other taxable income is subject to corporation tax
Property income is paid net of 20% income tax.
Distributions of interest are paid gross
Dividends are paid gross

Question 4

Insurance

Company Property Funds

Answer 4

Direct holdings of commercial property
Cannot borrow money
Encashment can be suspended
Income and capital gains subject to up to 20% tax in fund

Question 5

Offshore

Property Companies

Answer 5

Can invest 100% directly in property (as opposed to property companies)
Not liable to UK corporation tax or tax on capital gains
Is liable to UK income tax on rental property within UK

Question 6

Real Estate Investment Trusts (REITs)

Answer 6

• Closed ended companies listed on stock exchange (includes AIM)
• Resident in UK for tax purposes
• Issues one class of ordinary share
• At least 75% of total gross profits must be from tax-exempt business
• Interest on borrowings has to be at least 125% covered by rental profits
• Exchange traded - can trade at discount or premium to NAV

Question 7

REIT Taxation

Answer 7

• Ring-fenced property letting business - exempt from corporation tax (90% of these profits must be distributed as dividends)
• Other activities - subject to corporation tax

Question 8

Investor Taxation

Answer 8

• Ring-fenced tax-exempt element - treated as UK property income (paid net of 20% tax)
• Non-ring-fenced element - taxed as any other dividend/investors pay tax depending on their
tax position
• Gains subject to CGT