Policy paper

Corporation Tax: Real Estate Investment Trusts (REITs)

Published 15 March 2023

Who is likely to be affected

This measure affects UK single company or group Real Estate Investment Trusts (‘UK REITs’), and those investing in UK REITs.

General description of the measure

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

In particular, the changes will:

• remove the requirement for a REIT to hold a minimum of 3 properties where it holds a single commercial property worth at least £20m
• amend the rule that deems a disposal of property within 3 years of being significantly developed as being outside the property rental business so that the valuation used when calculating what constitutes a significant development better reflects increases in property values
• amend the rules for deduction of tax from property income distributions paid to partnerships to allow a property income distribution to be paid partly gross and partly with tax withheld

Policy objective

The rules for UK REITs were introduced in Finance Act 2006. Since 2006 the number of UK REITs has grown to 118. The real estate sector has evolved and the number of large institutional investors in REITs has increased, so that certain rules have become outdated or create unnecessary costs, administrative burdens and constraints for some REITs.

The objective of this measure is to alleviate certain constraints and administrative burdens to enhance the attractiveness of the UK REIT regime for real estate investment.

Background to the measure

At Budget 2020, HM Treasury launched a consultation on the tax treatment of asset holding companies (AHCs) which included questions about investments in real estate.

Responses to that consultation in respect of REITs led to proposals for changes to the REIT regime being included in a second consultation on AHCs published on 15 December 2020. Following on from some initial changes to the REIT rules introduced from 1 April 2022, the Edinburgh Reforms announced on 9 December 2022 that further amendments would be made.

Detailed proposal

Operative date

The measure will have effect from 1 April 2023.

Current law

Current law is in Part 12 Corporation Tax Act 2010 (CTA 2010).

The conditions for property rental business, including the requirement to hold at least 3 properties are in section 529.

The rules for disposals within 3 years of significant development work are in section 556.

The rules about payment of property income distributions to partnerships without deduction of tax are in Regulation 7 of SI 2006/2867- the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006.

Proposed revisions

This measure makes the following revisions to CTA 2010:

• amends sections 527 and 529 to allow a REIT to hold a single property, where that property is a commercial building with a minimum value of £20 million, with a corresponding change to sections 561, 563 and 575 that deal with breaches of the property rental business condition
• amends the valuation date in section 556 when applying the rule for disposals of a property within 3 years of significant development work

This measure also makes a revision to Regulation 7 of SI 2006/2867, the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006, to allow the payment of a property income distribution to a partnership to be made partly gross and partly with tax withheld. The distribution will be permitted to be paid gross to the extent that it is the income of partners that would be entitled to gross payment if they held an interest in the REIT directly.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	-25	Negligible	Negligible	Negligible	Negligible

These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2023.

Economic impact

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

Impact on individuals, households and families

This measure is not expected to impact on individuals as it only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.

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 is expected to have a negligible impact on around 120 existing REITs, investors in REITs and a small number of additional businesses that may elect to become a UK REIT.

The measure removes some of the administrative and cost burdens for investors in UK REITs. One-off costs will include familiarisation with the changes. Continuing savings could include certain investors not having to reclaim tax withheld when no tax is due.

The measure could also widen the scope of businesses able to elect to be a UK REIT. These businesses would face one-off costs as well as the continuing costs relating to the monitoring and provision of more information to HMRC in compliance with the REIT regime.

Customer experience for REITs is expected to improve because the measure will alleviate certain constraints and administrative burdens associated with the UK REIT regime. This may make investment in REITs more attractive for some investors.

This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC do not anticipate any operational impacts due to this change.

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: Email: financialservicesbai@hmrc.gov.uk.