The new UK REIT regime: implications for real estate fund managers

The rules for UK REITs were first introduced in the Finance Act 2006, and since then the number of UK REITs has grown to more than 100. In this time however, the real estate sector has evolved, and the number of large institutional investors in REITs has increased, meaning elements of the current regime have become outdated whilst creating an unnecessary cost and administrative burden for managers.

Following the 2020 Budget, HM Treasury launched a consultation on tax treatment of asset holding companies (‘AHCs’), which included REITs and their use by real estate fund managers. Following the conclusion on 23rd February 2021 of two consultations relating to AHCs, HM Treasury announced changes to the REIT regime aimed at enhancing the attractiveness of the UK for real estate investment.

The changes include amendments to the tax rules applying to REITs, and take effect from 1st April 2022.

What are the changes?

The proposed changes to the regime include amendments to the listing requirements, as well as changes to the tax rules for REITs. Most notable changes include:

  • Listing requirement – Removal of the requirement for REIT shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the ordinary share capital in the REIT.
  • Equivalence to a UK REIT – Relaxation to the definition of an overseas holding structure to be equivalent of a UK REIT, so that the overseas entity itself, rather than the overseas regime to which it is subject, needs to meet the equivalence test.
  • Holders of excessive rights – Removal of the ‘holders of excessive rights’ charge, where property income distributions (‘PIDs’) are paid to investors with a greater than 10% holding. This rule will be relaxed for shareholders entitled to gross payment of distributions (such as UK tax resident companies or pension funds).
  • Balance of business test – if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test. Further, non-rental income generated by a REIT in complying with certain planning obligations can now be disregarded in all parts of the balance of business test.

What does this mean for fund managers?

For real estate investors, the REIT regime has long been an attractive way to hold income generating property in a tax efficient manner. However, to date, the listing requirement has caused an additional burden for those managers looking to utilise the regime for the holding of income producing assets. More recently we have seen some managers using The International Stock Exchange for listing of REITs, where there is no free float requirement, but the listing requirement still remains.

Key benefits of the new UK private REIT:

  • In the UK, a REIT is not taxed on income and gains from property rental business, with the tax being paid by shareholders upon distribution instead, the new rules will make it far easier for private fund managers to utilise a UK REIT to both attract new capital and also to hold real estate and distribute income in a tax efficient manner.
  • The REIT brand is well recognised by global institutional investors, with around 40 countries globally currently having an equivalent regime.
    Removing the listing requirement will also reduce the administrative burden placed on managers and their service providers, so these structures will have a lower operating cost than listed REITs.
  • In addition, REITs will qualify as a “relevant qualifying investor” under the new Qualifying Asset Holding Companies rules, making the REIT increasingly attractive for investing in non-UK assets whilst retaining structures onshore.

There are trade-offs to consider:

  • Reduced liquidity when compared with e.g., a main market listed REIT, but for many institutional investors that routinely invest in closed-ended funds, this will be part and parcel of doing business in real estate.
  • Managers also need to be aware that whilst a private REIT has a reduced operational burden when compared to a listed REIT, the REIT rules still need to be adhered to, for which specialist third party tax advisors are recommended.

How can Langham Hall help?

Langham Hall remains the largest independent administrator of Real Estate funds in the UK, working with both listed and private REITs. We are able to provide a full suite of administration and AIFMD services to these structures, including REIT administration, accounting, depositary and host AIFM services.

With these new changes coming into effect on 1st April, we expect to see a rise in the number of managers utilising the new REIT regime, and indeed we are already working with several clients looking to take advantage of this.