Important Note: As at 1 July 2016. This is a summary of the United Kingdom (“UK”) Real Estate Investment Trust (“REIT”) legislation and of certain tax consequences for shareholders. This summary is intended to provide only a general outline of the subjects covered and is restricted to certain UK tax consequences only. Regional REIT Limited accepts no responsibility for any inaccuracies contained herein. This summary should be regarded as neither comprehensive nor sufficient for making decisions, nor should it be used in place of independent professional investment and tax advice. Regional REIT Limited accepts no responsibility for any loss arising from any action taken or not taken by any person using this material.
REIT Summary
Regional REIT Limited and its subsidiaries are a United Kingdom Real Estate Investment Trust (“REIT”) group under UK tax legislation, having elected to enter the REIT regime with effect from 7 November 2015. Remaining in the regime is subject to meeting various conditions imposed by the legislation.
A REIT is a specialist tax-efficient investment vehicle built around real property assets, most specifically property rental/letting activities. REITs are quoted companies, or groups of companies, that own and manage property with the aim of generating a rental income. The rental income, after costs, is paid to shareholders as a dividend distribution so that, over time, dividends will represent a significant proportion of the shareholders’ total return. REITs are a well-established and globally recognised holding structure for property assets.
UK REITs are exempt from UK corporation tax on profits and gains of their qualifying property rental business. However, in consequence, UK REITs are required to distribute a minimum of 90% of their qualifying profits to shareholders as dividends (known as property income distributions, or “PIDs”). As shareholders receive higher pay-outs than they would if the REIT were subject to UK corporation tax on its property profits and gains, shareholders are then required to pay tax on the PIDs. The effect, in general terms, is that taxation is moved from the REIT to the investor and the investor is then liable for taxation as if they owned the property directly.
Defining a UK REIT
The qualifying rules for UK REITs include conditions in relation to the members of the REIT group, the REIT’s property rental business and the “balance of business” conditions.
In particular the conditions include the following:
- a UK REIT must operate a property rental business - either a UK or overseas property business;
- the ratio of the REIT’s property profits to its property finance costs must not fall below 1.25x;
- at least 75% of the REIT’s profits must be generated from its property rental business;
- at least 75% of the REIT’s gross assets must be assets relating to the property rental business; and
- in each accounting period the REIT must distribute at least 90% of the net income profits of its tax exempt business to shareholders (for whom this income is treated as UK property income rather than dividend income).
There are detailed rules which govern the operation of REITs in the UK and these can be reviewed on the Her Majesty’s Revenue & Customs (“HMRC”) website.
REIT Dividends
UK REITs are required to comply with the statutory requirements relating to money distributed to shareholders, and how those distributions are taxed. 90% of the net income profits of its tax exempt business has to be distributed to shareholders, known as a Property Income Distribution (“PID”). REITs can also distribute taxed income from its other activities, known as a Non-Property Income Distribution, (“non-PID”).
These distributions are commonly made by way of dividend payments. Dividends can be entirely PID, entirely non-PID, or a combination of the two. For Regional REIT the Board will determine the most appropriate make-up of the distribution on a dividend-by-dividend basis.
The tax treatment of PID and non-PID dividends differs. PIDs are taxable as UK property income in the hands of tax-paying shareholders, but treated separately from any other property letting income which a shareholder may receive. PID dividends are normally paid after deduction of withholding tax at the basic rate of income tax (20%), which the REIT pays to HMRC on behalf of the shareholder. Certain types of shareholder can receive PID dividends gross: UK Companies; Charities; Local Authorities; UK Pension Schemes; and, Managers of PEPs, ISAs and Child Trust Funds.
Non-PID dividends are treated in exactly the same way by shareholders as ordinary dividends paid by UK (non-REIT) companies. From 6 April 2016 the notional 10 per cent tax credit has been abolished and replaced with a dividend allowance, which will apply to the ordinary, non-PID dividends received by UK resident shareholders who are subject to UK income tax. This allowance does not apply to the PID element of dividends.
The precise elements of each dividend payable will be clearly stated on the dividend vouchers or dividend confirmation as appropriate.
Major corporate shareholders
Regional REIT may not, under UK REIT legislation, make a distribution to any corporate shareholder which is beneficially directly or indirectly entitled to 10 per cent. or more of the shares or dividends of the REIT, or if that corporate directly or indirectly controls 10 per cent. or more of the voting rights of the REIT.
The Articles of Incorporation of Regional REIT Limited prevent any distribution to such an ‘offending’ shareholder whilst permitting a dividend distribution by the Company to all other shareholders.