United Kingdom
The REIT regime – more flexibility
Under the current rules, a group which has elected to join the UK-REIT regime is exempt from corporation tax on any profits and gains arising from its 'property rental business'.
In order to benefit from this favourable tax position, the UK-REIT needs to meet a number of complex conditions, one of which includes the distribution of at least 90 per cent of its property rental income to its shareholders. As a consequence of the exemption from corporation tax, those shareholders are treated as receiving property income directly instead of a company dividend.
After much lobbying by industry bodies, today's Budget has announced that the payments of dividends from a REIT in the form of shares may be treated as property income distributions for the shareholders and therefore count towards the 90 per cent distribution requirement of the REIT. Those shareholders receiving such stock dividends will be subject to tax in the same way as other property income distributions. This change will be introduced in the first Finance Act following the election and will take effect from Royal Assent.
Comment
The measure will be welcomed by REITs who will now have the flexibility to be able to meet part or all of the distribution requirement without any detrimental effect on their cash flow. REIT groups may also wish to consider the postponement of any distributions, where possible, until the Finance Bill has received Royal Assent and a stock dividend is possible.