Slide 1: Real Estate Investment Trusts Qualifying criteria
Slide 2: Real Estate Investment Trusts Conditions for the company throughout the accounting period 1. It must be resident in the UK only (not subject to any overseas tax laws) 2. It must be a closed-ended company (cannot be an open-ended investment company – FSMA 2000 section 236) 3. Its share capital must be listed on a recognised stock exchange 4. It cannot be a close company, unless one of its investors is a collective investment scheme (a “close company” is one controlled by five or fewer shareholders – ICTA 1988 section 414) 5. It can issue only one class of ordinary shares or non-voting fixed-rate preference shares 6. It must not be party to any loan that is not considered under normal commercial terms (the interest must not be linked to company’s results or the value of its assets, or it must not exceed a reasonable commercial return – ICTA 1988 paragraph 1(5) of Schedule 18) This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 3: Real Estate Investment Trusts Conditions for the tax-exempt business throughout the accounting period The company must have a property rental business (considered the “tax-exempt business”), which satisfies the following conditions: 3. The business must include at least three properties 4. No one property may represent more than 40% of the total value of the properties in the business Assets must be valued at fair value and in accordance with IAS – FA 2004 section 50(2) 5. No property must be owner-occupied, in accordance with generally accepted accounting practice Where shares in two companies are stapled together, the two shall be treated as a single company 6. At least 90% of the profits of the business, arising in the accounting period, must be distributed in the form of a dividend This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 4: Real Estate Investment Trusts Conditions for the balance of business throughout the accounting period The company must continue to satisfy the following conditions with regard to the make up of its business: • The profits arising from the tax-exempt business must comprise at least 75% of the company’s total profits “Total profits” means the profits arising from the whole company, i.e. the tax-exempt and non taxexempt parts of the business “Profits” means before deduction of tax and excluding gains/losses on the disposal of property, calculated in accordance with IAS • At the beginning of any accounting period, the value of the assets in the tax-exempt business must equate to at least 75% of the total value of assets held by the company Assets must be valued at fair value and in accordance with IAS – FA 2004 section 50(2), and no account may be taken of liabilities secured against the assets The tax-exempt business must be effectively ring-fenced and treated as a separate company, with no off-setting between businesses This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 5: Real Estate Investment Trusts Entry charge corporation tax levy A company shall be liable to pay a corporation tax as an entry charge, which is: Market value (gross) of the assets x 2% A company can elect to pay the entry charge in four instalments, the first due on the date of entry and the other instalments payable on the first three anniversaries of that date, as follows: – – – – 0.50% for the 0.53% for the 0.56% for the 0.60% for the first instalment second instalment third instalment; and fourth instalment This equates to an aggregate charge of 2.19% This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 6: Real Estate Investment Trusts Other requirements maximum shareholding • A company may be penalised if it distributes a dividend to a shareholder who controls or is beneficially entitled to 10% or more of the company’s share capital The penalty will take the form of a charge in tax, either by reference to a person’s interest, to a rate of tax, or otherwise Such a charge may be waived or reduced if the company takes appropriate preventative action of a “specified kind” Action of a “specified kind” may include a provision within a company’s Articles of Association, to the extent that a distribution can be withheld from a shareholder breaching this limit and requiring the shareholder to reduce their holding or remove the beneficial right to the dividend • • This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 7: Real Estate Investment Trusts Other requirements level of debt or gearing • A company may be penalised if its profit to debt ratio is below a level of 1.25:1, calculated as follows: Profits + Financing Costs Financing Costs • • This equates to around 80% gearing The penalty will take the form of a charge in tax, by reference to the amount of debt that exceeds the required level This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 8: Real Estate Investment Trusts Other requirements development of real estate • A UK-REIT can develop a property within the ring-fenced, tax-exempt business providing it is for the purpose of generating future rental income, i.e. adding to its property investment portfolio If the property is developed to be sold for a profit, then the disposal would be treated as non tax-exempt, i.e. corporation tax rules would apply However, a distinction is made where properties are developed for investment purposes but later sold, providing a period of three years has elapsed, in which case the sale may be treated as tax-exempt Development for letting Development for sale Development for letting sold within three years Development for letting sold after three years tax exempt taxed taxed tax exempt • • This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 9: Real Estate Investment Trusts Other requirements group structures • • A group of companies may be considered a UK-REIT The principal company and all of its 75% subsidiaries, UK or overseas, form a group; including their 75% subsidiaries, and so on Not less than 75% of its ordinary share capital is owned directly - ICTA 1988 section 838 • The group may not include a company that is not an effective 51% subsidiary Beneficially entitled to more than 50% of profits and assets - TCGA 1992 section 170 • Insurance companies, their subsidiaries and OEICS are also excluded from groups This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
Slide 10: Real Estate Investment Trusts Summary of qualifying requirements • • • • • • • • • • • • UK resident only Closed-ended investment company Listed on a recognised stock exchange (not AIM) Not a close company Only one class of ordinary share Loans on normal commercial terms only Three properties minimum No single property over 40% of total assets No owner occupation 90% of profits to be distributed 75% of profits from the property rental business 75% of assets to be involved in the property rental business This presentation is provided as a general information guide only. It should not be relied upon as a substitute for specific legal or financial advice. Every effort has been made to ensure that the information in this presentation is correct at the time of publication - May 2006.
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