A REIT is exempt from corporation tax on both rental income and gains on sales of investment properties (and shares in property investment companies) used in a property rental business carried on in the UK.
REITs benefit from a rebasing of underlying property assets when the REIT elects into the regime or when it subsequently acquires a company owning property investments (meaning that the target company is treated as having acquired the property asset for market value at the date the target company joins the REIT, rather than the earlier time when it actually acquired the property). This means that a REIT does not need to seek a discount for any latent capital gain inherent in the target company.
Furthermore, when a REIT sells a company owning investment property, there is once again a market value rebasing of the property asset that the new owner benefits from (although if the company has not been in the REIT regime for at least 10 years, the rebasing of the asset on leaving the REIT is subject to a requirement that the property owning company retains the asset for a period of two years). If the two-year holding period is not satisfied, then the tax base of the property reverts to its original tax base ignoring the rebasing on exit from the REIT regime.
Tax is effectively levied at investor level (subject to the tax status of investors) on their share of rental income which is distributed to them by the REIT as a property income distribution (PID) potentially subject to 20% withholding tax. Distributions of exempt gains are treated in the same way i.e. as PIDs.
Shareholders are generally treated as receiving property income which is subject to corporation tax/income tax at the investor’s marginal tax rate. However, investors who are exempt from UK tax, can reclaim any withholding tax to put them into a position equivalent to investing directly in UK real estate.
Non-UK investors who are not within the charge to corporation tax, including non-resident companies not carrying on a UK property business, or otherwise within the scope of UK corporation tax, will be subject to income tax on PIDs from a UK REIT. In general, the mechanism of tax collection for non-UK shareholders is by the levying of a 20% withholding tax imposed on PIDs (distributions of exempt income and gains) so that non-UK shareholders shouldn’t then have an obligation to file UK tax returns.
Non-UK investors may benefit from a favourable treaty rate under their respective double tax treaty. UK treaties generally limit the rate of withholding tax that the UK can levy to 15%, although some investors, such as pension funds, can often benefit from lower rates which compare favourably to the 25% rate of corporation tax that applies to an ordinary property company from April 2023.
Profits on activities of the REIT other than the property rental business (the ‘residual business’), such as interest income or management services, will be subject to corporation tax in the normal way. Profits from property trading activity are also subject to tax in the normal way, as are profits from property development activity where more than 30% of the value of a property is spent on developing the property which is then sold within three years of completion of the development.
