 | What is a REIT?Article Published: 15:57 01/11/2006Article Classification: Property Portfolio Investment in Cape Verde |
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When Gordon Brown slammed one door shut in his Budget earlier in the year by scrapping the planned move to allow Self Invested Personal Pensions to invest in residential property; he opened another door with Real Estate Investment Trusts (Reits) – tax-efficient vehicles for property investment.
Reits will allow retail investors to invest in property without the risks or complications of direct ownership. Investors will be able to gain access to the Reits, expected to come into force in January 2007, either through buying shares in a Reits structure or a fund that invests in Reits.
To make them even more tax friendly, draft legislation laid before parliament said that people will be able to hold Reits in Isas. Brown's view is that a Reit is a more appropriate property investment vehicle for individual pensions than buying a single property as it reduces the risks involved.
Under the proposed Reits structure, property companies would pay no corporation tax but would hand 95% of net profits back to investors. The Reits would withhold the basic rate of tax of 22% on their distributions to shareholders and higher rate taxpayers would have to fund any outstanding payments.
In addition, under trust status the Treasury would lose substantial Capital Gains Tax and other corporate taxes. Therefore, not only do investors avoid all of the tax issues involved with owning a property directly, they will also receive larger dividends from the Reit than they would from holding a normal stock.Tom McPhail, head of pensions at Hargreaves Lansdown, says: "It's been comical watching the Chancellor over this issue, but ultimately it's probably the right way to invest in property.......it's a step in the right direction".
Olive Tree Managing Director Richard Brady says "We had provisionally set up a SIPP product for our clients prior to the Chancellor's change of mind, our intention was always to offer property through collective investments for Pensions though. We now offer a Closed Ended Property Portfolio (CEPP) which allows clients to buy collectively through a UK Ltd company for as little as £15,000. This is available now through a SIPP."
What is a REIT?
A REIT is a company that owns and manages income producing property, which can be commercial or residential. Most of this income is distributed to shareholders and in return the company is exempt from corporation taxes.
The returns from investing in a REIT are closely aligned with direct property investment, as the effect of “double taxation” at both the corporate and the investor level is removed.
UK-REITs are to be launched on 1 January 2007
The introduction of a UK-REIT regime, combined with the traditional strengths of London’s capital markets, will create exciting opportunities for the growth of the property investment sector. A UK-REIT will enjoy all the benefits of any other company listed on the Main Market, in addition to the advantages outlined below. Investors will also find this an exciting new asset class. UK-REITs, due to their tax efficient structure, will provide a range of important benefits to companies and investors.
As UK-REITs will be listed on the Main Market of the London Stock Exchange, they will also enjoy all the other benefits associated with being listed on the equity market. Benefits
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