Deloitte comments on REITs and SDLT Budget announcements

Real Estate Investment Trusts (REITs)

Commenting on today’s announcement on REITs (22/03/05), Phil Nicklin, real estate tax partner at Deloitte said:

"The Treasury has taken on board most of the major points made by the property industry during the consultation process. The revised rules will result in a flexible regime, which makes it likely that the major listed UK property companies will convert to a REIT and that the REIT sector will get off to a good start. However, the conversion charge may be a little too high to tempt those who have established listed property companies offshore back into the UK."

The main announcements made today include:

• The charge payable to enter into the regime will be equal to 2% of the gross market value of the properties that transfer to the REIT regime;
• The distribution requirement has been reduced from 95% to 90% of taxable profits and REITs now have 12 months to make the distribution (up from 6 months);
• A company will no longer be disqualified or ejected from the regime in the event that a shareholder holds 10% or more of the shares or votes in the company. Instead, a tax charge will be levied on the company in the event that it pays a dividend to a shareholder holding 10% or more, unless the company has taken reasonable steps to avoid paying such distributions;
• The interest cover ratio requirement has been reduced from 2.5:1 to 1.25:1. Furthermore the profits part of the ratio is now based on taxable profits before interest coss and capital allowances claims;
• REITs will now be able to issue fixed rate preference shares and convertible debt, which had previously been precluded;
• Most breaches of the regime will not result in automatic removal from the regime but will attract a tax charge in the REIT. REITs will now be able to remain within the regime provided that the breach is rectified by the end of the next but one accounting period.

The most important Stamp Duty Land Tax (SDLT) measure announced today is the removal of relief for the initial transfer of real estate to property unit trusts. Commenting on today’s announcement on SDLT (22/03/05) Michael Quinlan, the partner in charge of Stamp Tax at Deloitte said:

"Although widely anticipated, it is regrettable that SDLT relief for property unit trusts has been abolished. In our experience, property unit trusts have been used by life companies, investment managers and other savings institutions as tax efficient investment vehicles that allow broad participation in a manner that has benefited the public and the property industry. We would have hoped that the relief could have been retained in a more targeted form"

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