Arsene Taxand - Real Estate

Introduction of 'REITs' in the UK

The UK government announced on December 6, 2005 that it was going to introduce a specific tax regime for REITs (Real Estate Investment Trusts) in the UK comparable to the French SIIC regime that has been in force in France since 2003. We now know a little more about the Blair government's intentions with regard to this regime, following the publication on the HM Revenue & Customs website of draft legislation related to the new UK REIT which is scheduled to be introduced in 2007.

In summary, this new regime would apply to listed real estate companies in the UK, whose main business activity consists in property rental (at least 3 real estate assets must be held with none of them exceeding 40% of the value of the eligible portfolio). This rental activity would be required to represent 75% of the total value of the company's revenue and 75% of the balance sheet value of its assets. Activities ancillary to rental (management services and promotional activities) would therefore be authorized within a limit of 25% of its activities. Moreover, an important point is that no shareholder may hold 10% or more of the shares of the company in order for the regime to apply. The election for this regime would be valid for 10 years.

Companies meeting these requirements would be exempt from taxation of rental income, and also from taxation of capital gains on the sale of property falling within the scope of the tax-exempt sector. Finally, the REIT would be subject to an obligation to distribute 95% of its tax-exempt income.

For shareholders, the dividends distributed by the REIT would be subject to corporate income tax or personal income tax depending on whether the shareholder is an individual or a company and would be taxable in full subject to any specific tax exemption (e.g. in the case of a savings plan or not-for-profit charitable organization).This tax treatment would also be applied to non-resident shareholders, who would be subject to a form of withholding tax at a rate equivalent to the rate of taxation for UK tax residents, although the right to benefit from tax treaty provisions has not yet been clarified at this stage.

Finally, election for this treatment would lead to an "exit tax" on the company's unrealized capital gains, at a rate which has not yet been determined. It is anticipated that this rate will be attractive (between 15 and 20%) in order to ensure the success of this regime.

This bill will now be discussed with a view to its final adoption in April 2007.

Article prepared in conjunction with Chiltern Plc in London, a member of Taxand.