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Article:

UK REITS and the 2018 Budget changes

18 January 2019

Changes are being made to the tax regime for UK REITs as a consequence of the changes in the taxation of non-residents investing in UK real estate.

Background

The Chancellor has confirmed that the government will introduce UK tax for non-UK residents on their capital gains derived from a disposal of all types of UK land. Certain types of residential land were previously brought within the charge to tax from April 2013 and a further tranche from April 2015 so this is seen by the government as levelling the playing field for all types of taxpayer be they non-resident or UK resident.

As a consequence of this change, new legislation applying from 6 April 2019 will impact upon the tax rules applying to UK REITs and their investors.

What will change?

The draft legislation will mean greater flexibility for UK REITs in the way that they may make disposals going forward. Currently, a disposal of a property owning subsidiary will trigger a taxable event in the UK REIT; albeit the distribution of such a gain is not required to be distributed as a PID. Going forward it is intended that such an indirect sale would ordinarily be a non-taxable disposal. Such a gain would be treated as an addition to reserves that may be distributed as a PID in the normal way but would not be part of the required 90% distribution.  

Some share disposals will continue to be taxable such as when a share sale takes place within three years of a property development where the costs exceed 30% of the cost on entry to the regime or completion.

REITs may be at a competitive advantage to other company sellers as the UK property held by the company will also be rebased at the time it leaves the REIT group. This, taken together with a lower stamp tax charge, may significantly change the current practice of UK REITs that will typically only sell the property to avoid the taxable result that would up to 5 April 2019 arise on a sale of shares.  

A downside that arises is mainly for non-resident investors in UK REITs who will now be brought into UK tax on capital gains on a sale of their shares. It had previously been mooted that this would only apply to shareholdings of 25% or more but this lower limit has now been removed. It will be interesting to see whether this might lead to an adjustment to the value of UK REIT shares to reflect this. 

REITs that hold property through tax transparent vehicles such as Property Unit Trusts will be able to make an election to treat them as tax transparent for gains purposes. This means that REITs will, in future, be able to sell properties directly from a Property Unit Trust and benefit from the REIT exemption, without any concerns that the gain could be taxable for the Property Unit Trust.