REITs on the rise if CGT changes are implemented but planning must start now

By Paul Norman - Thursday, February 08, 2018 11:39

The government's proposed changes to property tax for overseas investors could result in big inflows to real estate investment trusts (REITs), or the establishment of new ones, but investors should be planning now to take advantage.

In the November Budget it emerged that HMRC is proposing changes to the way in which property, held by individuals or companies overseas, is taxed. From April 2019 these properties will be liable for tax on any gains made. This brings the taxation of property held by overseas entities in line with those held domestically.

According to Zoe Thomas, partner in the real estate team at Smith & Williamson, the accountancy, investment management and tax group, the proposed changes could "overturn a lifetime of company structuring for all immovable property".

Thomas writes: "Unlike a lot of recent changes aimed at the buy-to-let market the impact of this will be very far ranging, affecting both residential and commercial property: the focus is on who owns it. From April 2019, overseas owners of property could face unexpected bills of hundreds of thousands of pounds.

 “For many years individuals, and companies, have held property in company structures based outside the UK. There are commercial reasons for doing so, for instance if the company is based in a different country.

“However, this leaves decision-makers with a difficult choice: should they keep the property in the same structure, based offshore, and face paying tax on all gains or establish a REIT with the property involved but have to pay the legal fees and other costs, including?” said Thomas.

The key requirements for becoming a REIT are that the company: is resident in the UK and is not resident in another state for tax purposes; must not be an open-ended investment company; must have its shares listed on a recognised stock exchange (i.e. shares must appear on the Official List of the stock exchange); must distribute at least 90% of the (income) profits of its tax-exempt business as measured for tax purposes; has a property rental business which involves at least three separate rental properties; and cannot have any one property, involved in the property rental business, being more than 40% of the value of all the property assets in that business.

Thomas says: “This seems to be another attempt by the government to drive activity through taxation. The REIT has to be based in the UK; these changes therefore give the government more oversight of who owns what. The drawback for many will be the SDLT a number of upfront costs, with transferring the property from the overseas structure to the REIT.

“However, as taxable rent and all CGT are not taxed in a REIT, the mechanism will potentially be cost neutral relatively quickly and potentially saving thousands in the long run. ”

Thomas says planning needs to start now.

“April 2019 may seem far off but, if an owner was looking to make the transition, they need to start the planning process now. Realistically it will take at least six months to establish a REIT, including listing, so businesses and individuals should begin considering their structure now."

pnorman@costar.co.uk

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