Policy paper

Real Estate Investment Trust regime amendments

Published 22 November 2023

Who is likely to be affected

This measure affects UK Real Estate Investment Trusts (REITs), and those investing in UK REITs.

General description of the measure

This measure makes amendments to the tax rules applying to REITs, including some of the conditions that determine whether a company qualifies as a REIT.

Policy objective

The rules for UK REITs were introduced in Finance Act 2006. Since 2006 the number of UK REITs has grown to approximately 130, the real estate sector has evolved, and the number of large institutional investors in REITs has increased.

The objective of this measure is to modernise the regime and alleviate certain constraints and administrative burdens, to enhance the attractiveness of the UK REIT regime for real estate investment, and ensure that the rules keep pace with commercial practice.

Background to the measure

The government’s ‘Review of the UK funds regime: a call for input’ was published on 26 January 2021 with a summary of responses issued on 10 February 2022. As part of this wider review of the UK funds regime, the government considered proposals for further changes to the REIT regime to reduce unnecessary burdens and make the regime more attractive for investment in the UK. Some of these changes were made in Finance Act 2022 and Finance (No. 2) Act 2023. This measure brings forward a third tranche of changes.

Detailed proposal

Operative date

The changes will have effect on and after the date of Royal Assent to Finance Bill 2023 other than:

• the amendments which make clear that it is possible to trace through intermediate holding companies where an institutional investor is the ultimate beneficial owner of the shares in a REIT (which will be treated as always having had effect)
• the amendment to clarify the definition of property financing costs (which will be treated as always having had effect)
• the exclusion from the definition of property financing costs of certain amounts in respect of which a deduction is denied for corporation tax purposes (which will have effect for accounting periods ending on or after 1 April 2023)

Current law

Current law is in Part 12 of the Corporation Tax Act 2010 (CTA 2010):

• the condition that a REIT company must not be a close company (including the exception to that rule where a company is close only because it has one or more institutional investors as a participator) is in section 528
• the rule allowing a REIT to hold a single commercial property is in section 529
• the exemption from tax on gains on disposals by REITs of rights or interests in a UK property rich company is in section 535A
• the profit to financing cost ratio is in section 543 and section 544
• the charge for holders of excessive rights is in section 551 and the meaning of a ‘holder of excessive rights’ is in section 553
• the rule that prevents insurance businesses from holding an interest of 75% or more in a REIT group is in section 606

The modifications of the corporate interest restriction rules for REITs are in section 452 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

Proposed revisions

This measure makes the following revisions to the Corporation Tax Act 2010:

• amends the definition of ‘institutional investor’ in section 528(4A) to require authorised unit trusts, open-ended investment companies (including, in each case overseas equivalents), and collective investment scheme limited partnerships to meet a genuine diversity of ownership condition or a non-close condition — the amendment will also require persons acting in the course of a long-term insurance business to meet a non-close condition in order to qualify as an institutional investor — transitional provisions will apply, and consequential changes will be made to sections 528ZA and 528ZB, which relate to an exception to condition C in section 528 (broadly the requirement to be admitted to trading on a recognised stock exchange)
• amends the exception to the non-close condition (which applies where a company is only close because it has one or more institutional investors as a participator) to make clear that it is possible to trace through intermediate holding companies where an institutional investor is the ultimate beneficial owner
• amends section 528(4A) to add Co-ownership Authorised Contractual Schemes that meet a genuine diversity of ownership condition or a non-close condition to the list of entities regarded as institutional investors
• amends Condition C in section 529 (which applies to REITs holding a single commercial property) to ensure the condition works as intended where there is a change in the property held
• expands the exemption for gains on disposals of interests in UK property rich companies in section 535A to include gains realised on disposal of interests in a UK property rich Co-ownership Authorised Contractual Scheme
• amends section 606 to enable insurance companies to hold an interest of 75% or more in a group UK REIT
• Amends section 544(3) to clarify that, for the purposes of the profit to financing cost ratio, ‘property financing costs’ means financing costs which are referable to the UK property rental business, and inserts section 544(4A) to exclude from the definition of property financing costs certain amounts in respect of which a deduction is denied for corporation tax purposes
• amends section 553 to prevent investors from being holders of excessive rights where they are taxed at a particular rate, or are not taxed at all, on distributions from the relevant REIT under the terms of a double tax agreement other than where that is conditional on holding an interest of a certain size in the REIT

In addition, the measure:

• amends section 452 of TIOPA 2010 so that for the purposes of the calculation of the corporate interest restriction, there is a disregard of the REIT exemption for disposals of rights or interests in UK property rich companies (section 535A of the Corporation Tax Act 2010) in the same way as there is a disregard of the REIT exemption for direct disposals of assets (section 535 of the Corporation Tax Act 2010)
• makes consequential changes to the non-resident capital gains rules for collective investment vehicles contained in Schedule 5AAA of the Taxation of Chargeable Gains Act 1992

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
Negligible	Negligible	Negligible	Negligible	Negligible	Negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

There is no impact on individuals as this measure only affects businesses.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible impact on approximately 130 existing REITs, investors in REITs, and additional businesses that may elect to become a UK REIT.

One-off costs for businesses already in the REIT regime will include familiarisation with the changes. There is not expected to be any continuing costs for those businesses.

The measure could also widen the scope of businesses able to enter the UK REIT regime. These businesses’ one-off costs could include familiarisation with the changes and registration into the regime. Continuing costs could include having to record more information, carrying out more calculations, and providing HMRC with information to comply with the regime.

This measure is expected overall to improve businesses’ experience of dealing with HMRC as it will alleviate certain constraints associated with the UK REIT regime and clarify and improve the operation of the legislation. This may make investment in REITs more attractive for some investors.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

There are anticipated to be operational costs estimated to be £2.04 million for this change. These costs include changes to IT systems used for reporting to support compliance monitoring with aspects of the measure, plus a small amount of staffing costs.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through ongoing communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the REIT policy team by email: financialservicesbai@hmrc.gov.uk