Tax-free gains attract commercial property

Within months, hundreds of the new-style property trusts are expected to be up and running, with the result that much of Britain's commercial property, and eventually residential property as well, could be held in vehicles that avoid corporation tax and capital gains tax.

The arrival of the real estate investment trust, or REIT, follows a change in the law. Britain's biggest commercial property owners can now change their corporate status and turn themselves into investment trusts. This allows them to own property and distribute the gains tax-free.

The end of this ‘double taxation’ will allow dividends to be paid out of untaxed income provided at least 90 per cent is distributed to investors.

To convert, trust companies must pay a one-off charge to the Treasury equivalent to 2 per cent of the value of their property portfolio. After that, it will be free to expand its portfolio with little hindrance from the tax authorities.

The new REITs are also expected to attract investors in residential property. The rules for holding residential property within the new trusts are complicated, but still likely to prove enticing to some investors.

Your questions answered

Q: What is a REIT?
A: It's a new type of company that allows investment in commercial or residential property to produce tax-efficient rental income. Ninety per cent of this income must be distributed to shareholders of the UK-REIT and, in return, the company is exempt from corporation tax and capital gains on property sales.

Q: Who can invest in a REIT?
A: Anyone can buy shares in a REIT, much like a unit trust.

Q: Why invest in a REIT?
A: REITs avoid paying corporation tax and capital gains. The investor can also avoid paying tax on their dividend income if their shares are held, say, in an ISA or a self-invested personal pension (SIPP).

If you require any more information on this subject, please e-mail or contact us for more information.

The value of units can go down as well as up. Past performance is no guarantee of future returns. Levels and bases of, and reliefs from, taxation are subject to change.
Article date: March 2007