REITs rules relaxed

UK Real Estate Investment Trusts are already highly attractive vehicles for holding property investments but the government is looking to alleviate certain constraints and administrative burdens to enhance the attractiveness of the UK REIT regime for real estate investment.

Under rule changes that will take effect for accounting periods commencing on or after 1 April 2022 (or 1 April 2022 for the change to the “holder of excessive rights charge), it will become easier for institutional investors to set up REITs in the UK as the government is removing the need for REIT shares to be admitted to trading on a recognised stock exchange (provided institutional investors hold at least 99% of the ordinary share capital in the REIT). This will remove significant cost and administrative burdens for pension funds, unit trusts and other ‘genuinely diversely owned’ collective investment schemes wishing to invest in property through a REIT. 

The rules are also being relaxed for overseas property holding structures to qualify as ‘equivalent to a UK REIT’: broadly, as long as the structure itself meets the UK REIT tests it will qualify even if the relevant jurisdiction it operates from does not have equivalent REIT legislation. 

The current rules impose a ‘holders of excessive rights’ charge where property income distributions (PIDs) are paid to investors with more than a 10% shareholding in the REIT. This rule is to be relaxed for shareholders who are entitled gross payment of distributions from the REIT. This will avoid the need for many investors, including UK tax resident companies, to fragment their shareholdings using costly structures solely to remain under the 10% limit. 

Another welcome relaxation of administrative burdens is that there will be a new simplified ‘balance of business test’. Where a REIT’s property rental business profits and assets comprises at least 80% of group totals it will no longer need to prepare financial statements to prove that each entity in the REIT group meets the 75% income and assets test. And where a REIT generates other income as a result of complying with S106 planning orders, this income can now be ignored for the purposes of the test. 

These relaxations don’t go as far as we had hoped when the original consultation was published, for instance there are no changes around the close company requirements that can be so burdensome. However, they are a welcome step in the right direction and will make it easier for institutional investors to use REITs as a vehicle for UK property investment.