Policy paper

Corporation Tax — amendments to the Real Estate Investment Trust (REIT) regime

Published 18 July 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 127, the real estate sector has evolved and the number of large institutional investors in REITs has increased. Certain rules no longer serve a purpose, create unnecessary cost and administrative burden for some REITs, or do not now work as originally intended.

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 in line with the overall policy intent.

Background to the measure

A ‘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 Act 2023. This measure brings forward a third tranche of changes.

Detailed proposal

Operative date

All changes will have effect on and after the date of Royal Assent to Finance Bill 2023-24 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 the REIT will be treated as always having had effect
• the amendments to the definition of property financing costs will be treated as always having had effect

Current law

Current law is included 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 exemption from the rule for participators who are institutional investors and the list of those institutional investors, 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 provided for at section 535A.

The profit to financing cost ratio is in section 543 and section 544.

The rule that prevents insurance businesses from holding an interest of 75% or more in a REIT group is at section 606.

The modifications of the corporate interest restriction (CIR) 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 CTA 2010:

• amend 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.
• amend the rule in section 528(4)(b) to confirm that it is possible to trace through intermediate holding companies where an institutional investor is the ultimate beneficial owner when applying the exemption from the non-close condition
• amend section 529(2B) which defines the ‘relevant time’ for the purposes of the valuation of a property held by a REIT to ensure the rule for REITs involving a single commercial property works as intended where there is a change in the property held
• expand 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 Schemes (CoACS).
• repealing parts of section 606 to enable insurance companies to have an interest of 75% or more in a group UK REIT
• amend section 544(3) and insert section 544(3A) to clarify for the purposes of the profit to financing cost ratio that ‘property financing costs’ means financing costs which are referrable to the UK property rental business and insert 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

In addition, the measure will amend section 542 of TIOPA 2010 so that for the purposes of the CIR, the REIT exemption for disposals of rights or interests in UK property rich companies (section 535A CTA 2010) is disapplied in the same way the REIT exemption for direct disposals of assets (section 535 CTA 2010).

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	empty	empty	empty	empty	empty

The final costing will be subject to scrutiny by the Office for Budget Responsibility (OBR), and will be set out at the next fiscal event.

Economic impact

This measure is not expected to have any significant macroeconomic 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 127 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, doing more calculations and providing HMRC with information to comply with the regime.

This measure is expected overall to improves 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 £2.13 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. None of the HMRC’s Evaluation Principles criteria apply to this measure

Further advice

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