Real Estate Investment Trusts (REITs) in the UK are subject to specific tax regulations designed to promote investment in the real estate sector.
Tax Considerations for UK REITs:
Corporate Tax Exemption:
REITs in the UK can benefit from a corporate tax exemption on their rental income and capital gains derived from qualifying UK and overseas properties. This means that REITs are not subject to corporation tax on their property rental income and gains.
Property Income Dividends (PIDs):
One of the requirements for REIT status is to distribute at least 90% of their taxable rental income to shareholders as Property Income Dividends (PIDs). PIDs are subject to withholding tax at the basic rate, which is currently set at 20%. The tax is deducted at source by the REIT before paying the dividends to shareholders.
Shareholders who receive PIDs from a REIT are generally subject to income tax on the dividends they receive. The dividends are treated as property income rather than dividends from a standard company. However, shareholders may be eligible for certain reliefs or exemptions depending on their individual circumstances.
Stamp Duty Land Tax (SDLT):
REITs are generally exempt from paying SDLT on the purchase of properties for rental or investment purposes. However, there are certain conditions and requirements that must be met to qualify for this exemption.
Capital Gains Tax (CGT):
When a REIT sells a property, it is generally exempt from paying capital gains tax on the disposal of qualifying properties. However, certain conditions must be met, including the requirement to distribute at least 90% of the net gains to shareholders within certain timeframes.
VAT (Value Added Tax):
REITs may have certain VAT considerations depending on the nature of their activities. For example, the rental income from some properties may be subject to VAT, while others may be exempt.
REITs may also have the ability to recover VAT on certain expenses related to their property holdings.
REITs can claim capital allowances on qualifying capital expenditure incurred on their properties. Capital allowances allow for tax relief on the costs of acquiring, improving, or maintaining the property. The availability and calculation of capital allowances can be complex and depend on various factors, including the nature of the property and the specific expenditure.
Non-Resident Landlord Scheme:
If a REIT has non-resident shareholders, it may need to comply with the Non-Resident Landlord Scheme. This scheme requires the REIT to deduct tax at the basic rate from rental income paid to non-resident shareholders and remit it to HM Revenue & Customs (HMRC).
Thin Capitalization Rules:
REITs need to consider thin capitalization rules, which restrict the amount of interest expense that can be deducted for tax purposes if the company has excessive debt-to-equity ratios. These rules aim to prevent profit shifting through excessive interest deductions and ensure a fair allocation of taxable profits.
If a REIT has transactions with related parties, such as rental income or management fees, transfer pricing rules may apply. These rules ensure that transactions between related parties are priced at arm’s length, reflecting market value for tax purposes.