Last edited 04 Aug 2020

Real estate investment trust REIT

A Real Estate Investment Trust (REIT) is a company that owns and manages property on behalf of investors where revenue is principally (not less than 75%) derived from rent or interest on mortgages. As such, REITs receive special tax considerations. Owner-occupied properties are excluded from such trusts.

Many of the largest property development companies have, since their introduction in 2007, restructured themselves as publicly-quoted REITs.

This structure offers certain tax advantages to investors as well as providing property investment opportunities to those investors who do not wish to invest directly into the property market, either commercial or retail, and who wish to be able to trade in and out of the asset class.

REITs are exempt from paying corporation tax or capital gains tax on profits, but must instead pay out at least 90% of property income to investors in the form of dividends which are then subject to tax depending upon the circumstances of each investor. A withholding tax is applied at the time that dividends are paid.

For these reasons, a REIT is an investment structure that appeals to the widest possible cross-section of potential investors, all of whom will have very differing income and tax considerations.

Typically, the REITs market offers the investor high yields and liquidity not usually associated with the ownership of property. Investors can purchase individual REIT shares through the stock exchange or can invest in a fund that specialises in property holdings thereby spreading risk across the property sector. Generally, REIT investments apply to commercial buildings, shopping centres, warehousing and residential apartment blocks.

To become a REIT a company must be listed on a recognised stock exchange.

Subject to the rules, companies and groups can become REITs paying an entry charge on 2% of the value of their investment properties which can be spread with interest over four years. This is taxed at the main rate of corporation tax.

No investor may have more than a 10% stake in a REIT.

On the condition that a REIT distributes at least 90% of its property income and capital gains by way of dividends, distribution is made without deduction of tax. While the investor will be taxed on the basis of property income it is not subject to capital gains tax. Effectively, it is a way of an investor benefiting by capital gain on property without having to pay capital gains tax.