Saving and investing in depth
The tax advantages of investing in REITs
June 2007
One of the most attractive aspects of the Government’s new investment instrument, Real Estate Investment Trusts (REITs), are the numerous tax advantages on offer. Created to encourage private investment in real estate, REITs are extremely tax-efficient as they are free from Capital Gains Tax and Corporation Tax and can also be held in PEPs, ISAs and SIPPs.
The qualifying conditions
There are a number of conditions an investment must meet to qualify for the tax breaks. REITs must be in the form of a company which is a tax resident in the United Kingdom and must be publicly listed on a recognised stock exchange. Also the company must not be party to any loan where the results are dependent on the profits of the business. In order to qualify a REIT must pay at least 90 per cent of its profits from its property rental business back to investors in dividends.
Free of Capital Gains Tax and Corporation Tax
Capital Gains Tax is currently charged in bands at rates of ten, 20 and 40 per cent, so if investors fall into the top band they can make considerable savings. With REITs, Capital Gains Tax is payable at a rate of 30 per cent on non-property holdings within a REIT, but this is still below the highest band and in order for the REIT to qualify for the Corporation Tax, at least 75 per cent of a company’s activity must relate to the ring-fenced property letting business both in terms of income and assets. The rate of Corporation Tax payable on a REIT would most likely be in the highest band of 30 per cent and since this is not payable (provided the aforementioned criteria are met) again investors can make considerable savings.
Qualifying shares in a PEP, ISA and SIPP
REITs can be wrapped in a PEP, ISA or SIPP making them even more attractive to investors. REITs aim to provide higher levels of dividends that investors can take as income. If the REIT is held in an ISA this income is tax free.
Summary
REITs offer investors a new property income stream that can help diversify an income-bearing portfolio. As REITs can be ISA qualifying, they are an especially attractive proposition, because the high predicted dividend rates will be tax free if taken as income from an ISA.
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