REITs

Question 1

What is a REIT?

Answer 1

A REIT is a special form of investment company investing in property. They qualify for special tax treatment (exempts them from corporation tax on rental income & passes liability on to investor) if structured correctly.

Question 2

What 7 criteria must a REIT meet to qualify for the special tax treatment?

Answer 2

1. Must be UK resident & close ended & listed on a recognised stock exchange.
2. It must not be controlled by 5 or fewer participants.
3. There can only be issue of ordinary & preference shares.
4. It must hold at least 3 properties & not one can be worth more than 40% of the total capital.
5. At least 75% of gross profits have to come from letting property.
6. Interest on borrowing must be at least 125% covered by rental income.
7. At least 90% of rental profits must be paid to investors as a dividend within 12 months of the end of the accounting period.

Question 3

What two elements are distributions on REITs split into?

Answer 3

1. A payment from the ‘tax-free pot’ - treated as property income, taxed in the hands of the investor. No corporation tax is paid. This is the big distinction for the REIT.
2. A payment from the ‘non-tax-free pot’ - this part of taxed to corporation tax & when paid out treated as a dividend & taxed on the investor.