REITs: A comprehensive guide

What are REITs and why are they useful?

A UK Real Estate Investment Trust, known as a UK-REIT, is a company or group of companies that own and manage a real estate portfolio that generates rental income and capital gains for shareholders. UK-REITs are distinguished from other UK property investment companies only by their tax status.

Companies in the UK-REIT regime are exempt from UK corporation tax on rental profits, and on capital gains deriving from their UK property rental business. In turn, the UK-REIT must distribute 90% of its net property rental income to its investors within 12 months of each accounting period. These distributions are treated as property income in the hands of shareholders, and are called Property Income Distributions, or PIDs. According to HMRC, there are around 200 registered entities within the regime.

Since 2022, non-listed REITs have been able to form, and newer entrants have focused on specific asset classes like logistics, the private rented sector, healthcare or social housing, as well as newer property types like data centres and biotech, rather than being generalist real estate investors.

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REIT Tax Benefits

UK-REITs are exempt from UK corporation tax on rental profits, and on capital gains from their UK property rental business. Any profits from the UK-REIT’s ‘residual businesses’ like interest income, property management income and any profits on sales of development property are subject to normal corporation tax.
 

International Tax Considerations

The UK-REIT structure is recognised as a preferred property ownership vehicle by international investors, some of whom may be restricted from investing in non-REITs. Offshore property companies find the UK-REIT regime particularly attractive, because it can deliver tax efficiencies for holding UK properties without the need for an offshore structure. This can free up senior management time and reduce administrative costs.

For businesses with mixed UK and overseas property portfolios, a UK-REIT will be treated as a Relevant Qualifying Investor under the UK Qualifying Asset Holding Company (QAHC) regime. In practice, this allows UK-REITs to hold shares in QAHCs and get the tax advantages available to those entities.

It is important to note that the main requirement for becoming and remaining a UK-REIT is that the parent company must be tax resident exclusively in the UK.
 

REIT Requirements 

Minimum shareholder thresholds

In 2022, the Government removed the listing requirement for REITs, where at least 70% of the REITs shares should be held by one or more institutional investors - like pension funds, insurance companies or private equity. The reforms opened up the regime, allowing a wider variety of investors to benefit from the regime’s tax efficiency. 


How should a UK REIT be composed?

A UK-REIT has specific requirements that designed to make sure the bulk of the business comes from qualifying real estate rental activities. These requirements include: 

  • At least 75% of worldwide profits of the group must derive from the property rental business;
  • A UK-REIT can own a single property if worth at least £20m at the time of acquisition, or three separate properties with no one property exceeding 40% of the total value of the portfolio;
  • Assets like owner-occupied properties, development land unless held for future rental and non-property investments do not qualify.


Income distribution obligations

REITs are required to distribute at least 90% of the aggregate net property rental income derived from the UK property rental businesses of every company in the group. This must be distributed by the parent company of the group to its shareholders.
 

Regulatory Updates for REITs

UK-REITs are strongly supported by both HM Treasury and HMRC, providing REITs with relative certainty that their tax profile and advantages will remain in place for the foreseeable future. Reforms introduced since the regime began in 2007 have contributed to significant growth in the number of REITs. They have made the regime more flexible and attractive to a wider range of investors. Recent legislative changes in the regime include:

  • Close company rules relaxed: Since 22 February 2024, indirect ownership by institutional investors now qualifies under the “non-close” condition. Partnerships and general partners don’t automatically trigger close company status for the REIT. 
  • Financing cost ratio clarification: The Finance Act of 2024 introduced the rule that only financing costs relating to the UK property rental business are included in the profit-to-interest ratio; amounts disallowed under UK tax rules are excluded with retrospective effect.
  • Single-property rule: From 1 April 2023, a REIT may hold just one commercial property (worth at least £20 million) instead of the previous requirement of three distinct properties.
  • Relaxation of listing requirement: From 1 April 2022, UK-REITs were no longer required to have their shares listed on a recognised stock exchange if at least 70% of their ordinary share capital is owned, directly or indirectly, by institutional investors.
 

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