Policy paper

Real Estate Investment Trusts: amendments

Updated 27 October 2021

Who is likely to be affected

This measure affects UK single company Real Estate Investment Trusts (REITs), REIT groups 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 REIT shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the ordinary share capital in the REIT

  • amend the definition of an overseas equivalent of a UK REIT so that the overseas entity itself, rather than the overseas regime to which it is subject, needs to meet the equivalence test

  • remove the ‘holders of excessive rights’ charge where property income distributions (PIDs) are paid to investors entitled to gross payment

  • amend the rules requiring that at least 75% of a REIT’s profits and assets relate to property rental business (the ‘balance of business test’) to disregard non-rental profits arising because a REIT has to comply with certain planning obligations, and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test

  • introduce a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test

Policy objective

The rules for UK REITs were introduced in Finance Act 2006. Since 2006 the number of UK REITs has grown to 92. 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has evolved and the number of large institutional investors in REITs has increased, so that certain rules have become outdated or create unnecessary costs, administrative burdens and constraints for some REITs.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. That consultation closed on 23 February 2021.

Detailed proposal

Operative date

The measure will have effect from 1 April 2022.

Current law

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

The conditions for a company to be a REIT, including the requirement for shares to be admitted to trading on a recognised stock exchange and the definition of institutional investors are in section 528.

The definition of holders of excessive rights is in section 553.

The balance of business test is in section 531.

The requirement for REITs to supply certain financial statements is in section 527 with further detail in sections 532 and 533.

Proposed revisions

This measure makes the following revisions to CTA2010:

  • amend sections 527 and 528 and insert sections 528ZA and 528ZB to remove the requirement for shares to be admitted to trading on a recognised stock exchange where institutional investors hold at least 70% of the ordinary share capital of a REIT
  • amend section 528(4A)(j) so that an overseas entity, rather than an overseas regime, needs to be equivalent to a UK REIT
  • amend section 553 so that investors entitled to receive PIDs gross in accordance with The Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 are excluded from the definition of holders of excessive rights; this means that a charge to Corporation Tax will not arise when PIDs are paid to such investors
  • amend sections 531 and 533 so that a REIT meets the balance of business test where profits of the group’s property rental business represent at least 80% of the total group profits and the group’s property rental business assets represent at least 80% of the total group assets, and to remove the requirement to supply financial statements in accordance with section 532(2)(a) and (c) for each member in this case
  • amend section 531 so that non-rental activities undertaken to comply with obligations under the Town and Country Planning Act 1990 will not be taken into account for the balance of business test
  • amend section 531 so that those items specified in section 531(4)(b) and (c) will not be taken into account for both the profits and assets components of the balance of business test
  • omit regulation 7, paragraph (3) of the Real Estate Investment Trusts (Financial Statements of Group Real Estate Investment Trusts) Regulations 2006 (S.I. 2006/2865) as a consequence of these amendments to the balance of business test

Summary of impacts

Exchequer impact (£million)

2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026 2026 to 2027
- -5 -5 -5 -5 -5

These figures are set out in Table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2021.

Economic impact

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

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

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 anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on around 100 existing 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 UK REITs, particularly those owned by institutional investors. One-off costs will include familiarisation with the changes. A continuing cost for a very small number of REITs could include marginally more complex calculations. One-off savings could include not having to list on a recognised stock exchange and not having to restructure in order to meet the conditions for REITs. Continuing savings could include the reduced resources required to complete the full financial statements.

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 measure is not expected to impact civil society organisations.

Operational impact (£million) (HMRC)

This measure will result in operational impacts for HMRC that are estimated to cost in the region of £1.2 million.

Other impacts

There are no impacts on climate and fuel poverty targets.

There are no impacts on Air Quality Targets.

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, contact the REIT policy team, email: financialservicesbai@hmrc.gov.uk.