Background
On 18 July 2023, HM Revenue & Customs announced a number of proposed changes to the UK REIT regime and published draft legislation to be included in Finance Bill 2023-24 although, subject to the Parliamentary process, a number of the rules will have retroactive effect. The changes are part of a package of measures to “reduce unnecessary burdens and make the regime more attractive for investment in the UK.”
Close company test
The REIT regime is aimed at widely held property investment businesses and the rules achieve this by requiring that the REIT is not ‘close’ (i.e. broadly, controlled by 5 or fewer participators (essentially, investors)). This is known as “condition D”. However, where a REIT is close by virtue of the participation by certain institutional investors, then the REIT is still regarded as satisfying condition D.
A key change is to allow REIT conversion where an institutional investor is an indirect shareholder (tracing ownership through intermediate companies in line with other tax regimes, such as the non-resident capital gains fund exemption election regime and the qualifying asset holding company regime) and not only where it is a direct shareholder in the REIT. This change will have retrospective effect.
The rules also make it clear that investors’ interests held in a REIT through a partnership, should not be treated as attributed to one another for the purposes of the close company rules, nor should the general partner’s possession of voting power in a CIS partnership cause the REIT to be close.
However, for the person acting on behalf of the CIS partnership to be treated as an institutional investor in their own right (as is currently the case), the partnership will be required to satisfy either the non-close test or the GDO test. This change will have retrospective effect, although grandfathering will apply providing the necessary conditions are met.
The GDO test is already a familiar concept having been used elsewhere in the REIT legislation and other regimes e.g. REITs owned by collective investment scheme (CIS) partnerships which satisfy the GDO test do not need to be listed. Broadly speaking, the GDO test requires that the scheme must satisfy certain marketing criteria to ensure that its units/shares are being offered to investors in the market.
In relation to the definitions of some of the other institutional investors, these will be changed to bring them into line with other regimes (e.g. in relation to the fund exemption regime for non-resident capital gains purposes):
- a person acting in the course of a long-term insurance business will need to satisfy the “non-close” condition; and
the following investors will be required to satisfy either the “Genuine Diversity of Ownership” (GDO) test or the “non-close condition”:
- Authorised unit trusts (and their overseas equivalents)
- Open-ended investment companies (and their overseas equivalents)
- Collective investment scheme limited partnerships
Existing REITs will therefore need to consider the impact of these changes to ensure that they continue to satisfy condition D and property groups aspiring to join the REIT regime may now find that these changes help them qualify, where previously they did not.
Insurance companies
Amendments are being made to allow insurance companies to be members of a group UK REIT. Historically, insurance companies and subsidiaries of insurance companies have been excluded from being members of a group UK REIT. This meant, for example, that whilst a life assurance business could wholly own a single company REIT, it could not own 75% or more of a group UK REIT. Such insurance businesses should now be able to establish REIT groups to invest in UK real estate.
Financing cost ratio
Two amendments have been proposed in relation to the calculation of the finance cost ratio. The first is to clarify that the financing costs to be included in the calculation, are those which are referable to the UK property rental business of the REIT. This clarification is retrospective.
The second change, which will apply from the enactment of the Finance Bill, excludes from the definition of property financing costs certain amounts in respect of which a deduction is denied for corporation tax purposes.
In addition, proposed revisions will amend the CIR so the REIT exemption for disposals of rights or interests in UK property rich companies is disapplied in the same way as the REIT exemption for direct disposals of assets, meaning that broadly, for CIR purposes, the REIT exemption on share disposals is disregarded when calculating the CIR restriction.
Exemption on sale of shares in property companies
The exemption on the sale of shares in UK property rich companies will be expanded to include gains realised on disposal of interests in a UK property rich Co-ownership Authorised Contractual Schemes (“CoACS”) and the proposed new Reserved Investor Fund (“RIF”).
Single property
Following changes which took effect from 11 July 2023 which allow a REIT to hold a single property, further changes are made to ensure that the provisions work as intended, although these changes are not retrospective.
Who to contact
If you wish to discuss this further, please get in touch with Paul Emery or Adam Yates, or your usual PwC tax contacts.
Paul Emery
UK REIT Leader
Tel: + 44 (0) 7931 716917
Email: paul.emery@pwc.com
Adam Yates
UK Real Estate Network Leader
Tel: + 44 (0) 7808 105780
Email: adam.yates@pwc.com