Recent developments in the UK: immoveable property regimes

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• Recent developments in the UK immoveable
  property regimes
• Michael Fekete, HM Treasury

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UK commercial property investment c.250bn
Source IPF research 2005
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UK tax reform to improve efficiency of property
mkt

• First launched consultation in 2004
• Key Government objectives identified
• Improving efficiency of property investment
• Expanding access to a wider range of investors
• Ensuring fairness for all taxpayers
• Improve flexibility for tenants
• Focused on common concept of a REIT

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What are the market inefficiencies in the UK?

• Property is unique in one sense can be held as
  investment either directly or indirectly.
• Current tax system affects investors decision.
• Quoted property company sector in decline.
• UK-REIT aims to remedy this by aligning the
  direct and indirect taxation of rental income.

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Most REITs globally are company structures?
rental income
Company
Company not taxed on capital gains from sale of
investment properties
Company not taxed on rental income
Distribution
Investor
Investor taxed when receives distribution
Tax investor at point investor sells shares
Aim is to tax the investors as though they were
investing directly
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Current proposed rules for UK-REIT regime

• Company listed on Recognised Stock Exchange.
• At least 75 of income and assets must be
  property rental
• Exempt from corporate tax on this ring-fenced
  income but must distribute 95 of net profits to
  investors.
• No shareholder more than 10 holdings.

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Interactions with Double Tax Agreements

• Starting principle is country with source of
  property income has primary taxing rights.
• OECD model Article 6 direct investment.
• Property is lumpy asset so indirect investment
  may offer better opportunities e.g. company.
• Significant history of taxing the distributions
  from companies i.e. dividends (Article 10).

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Taxation of dividends in REIT models
rental income
Company
UK investors receive property income
distribution
Overseas investors receive dividends
Distribution
Investor
Common treatment of dividends is a challenge to
REIT principle
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Looking to the future

• Property is unique (direct vs. indirect).
• Challenge for tax treaties to accommodate income
  from property and property market issues.
• OECD model could offer some clarifications on how
  REITs globally are treated.
• REITs are an example of use of corporate
  structures for collective investment.