In more detail
On 18 July 2023, the UK government published draft legislation intended to modernise the UK REIT regime with the aim of making it more attractive for real estate investment.
The proposed amendments are part of a wider review of the UK funds regime and follow changes made to the REIT rules in both the Finance Act 2022 and the Finance Act 2023. Most notably, the previous amendments: (i) removed the requirement for REIT shares to be listed where an institutional investor holds at least 70% of the ordinary share capital in the REIT; (ii) relaxed the requirement for a REIT to own at least three properties where a REIT holds at least one commercial property worth GBP 20 million or more; (iii) amended the rule for disposals of property within three years of significant development work (i.e., the fair market value of the relevant property is now taken to be at the later of entry to the REIT regime, acquisition, or the beginning of the accounting period in which the development commenced, this latter addition ensuring that the rule operates in line with its original intention and is not compromised by the effects of inflation); and (iv) reduced administrative burdens for certain partnerships investing in REITs.
The government has now proposed to:
- Make changes to the condition that a REIT must not be a close company (the ‘non-close condition’, i.e., broadly that it is widely held) by:
- Requiring authorised unit trusts, open-ended investment companies (including, in each case, overseas equivalents) and collective investment scheme limited partnerships to meet the genuine diversity of ownership condition
- Confirming that it is possible to trace through intermediate holding companies where an institutional investor is the ultimate beneficial owner when applying the exemption from the non-close condition (this amendment will be treated as always having had effect)
- Make changes to ensure the rule for REITs involving a single commercial property works as intended where there is a change in the property held (i.e., where a REIT sells a single property and acquires a replacement single property, the proposed change would allow for the value of the new single property to be determined with reference to the date of the disposal of the previous single property)
- Expand the exemption for gains on disposals of interests in UK property rich companies to include gains realised on disposals of interests in a UK property rich Co-ownership Authorised Contractual Schemes or the proposed new Reserved Investor Fund
- Enable insurance companies to have an interest of 75% or more in a group UK REIT
- Clarify that, for the purposes of the profit to financing cost ratio, “property financing costs” means financing costs which are referrable to the UK property rental business and excludes certain amounts in respect of which a deduction is denied for corporation tax purposes (the first of these will be treated as always having had effect, whilst the exclusion of amounts where a deduction is denied will have effect for accounting periods ending on or after 1 April 2023)
- Ensure that the REIT exemption for disposals of rights or interests in UK property rich companies is disapplied in the same way as the REIT exemption for direct disposals of assets for the purposes of the corporate interest restriction rules.
With the few exceptions noted above, the changes are expected to take effect from the date the Finance Bill 2023-24 receives Royal Assent.
The proposals should generally be welcomed by taxpayers affected by the rules, particularly groups that have insurance companies or institutional investors in their REIT structure. Nevertheless, the government has said that, as well as engaging on the detail of the provisions published this week, it will continue to consider the case for other reform options in this area so it is to be seen what further changes might make their way into the legislation over the coming months.
The government’s consultation on the draft clauses, including those relating to REITs, closes on 12 September 2023.
