The changes “will allow more cross-border M&A activity,” said Phil Nicklin, head of accounting firm Deloitte LLP’s unit focused on REITs. “Investment banks are already talking to me about this.”
The U.K. Treasury plans to propose a draft law today that will allow British units of overseas companies to qualify for REIT tax exemptions by loosening regulations on ownership and stock-exchange listings. The new rules would also abolish a charge to become a REIT equal to 2 percent of a company’s net asset value.
U.K. properties or companies will be eligible for REIT status if their owners’ shares trade on overseas exchanges as well as the Alternative Investment Market and the exchange in Londonrun by Plus Markets Group Plc, according to initial proposals released by the Treasury Oct. 13.
As many as 40 new REITs will be spawned by the package of changes to be announced later today, Nicklin estimated. The U.K. currently has 23 with a market value of about 20 billion pounds.
Most of new REITs will be conversions of funds currently based in low-tax offshore jurisdictions such as Jersey, said Mike Prew, an analyst at brokerage Jefferies & Co. The funds will seek REIT status to avoid additional costs created by a European Union directive that will tighten regulation and supervision of private funds.
Sweeping Changes
REITs in the U.K. avoid corporation or capital gains taxes in return for paying investors 90 percent of the income generated by their property. The changes proposed, the most sweeping to rules first introduced in 2007, would be adopted when lawmakers vote on the next fiscal-year budget by the second quarter of next year.
The new rules may help the creation of residential REITs as the government seeks to attract more investment into private rented accommodation, said Marion Cane, an executive director atErnst & Young LLP’s tax advisory arm for real estate, hospitality and construction. No U.K. residential REITs currently exist.
In March, the government lowered the tax cost of acquiring groups of properties by changing the way it calculates the property transfer tax, known as the stamp duty.
That change, combined with the rules being proposed today, “will help residential REITs, particularly as they build up a portfolio,” Ernst & Young’s Cane said.
Housing Assets
London & Stamford Property Plc (LSP), a REIT that owns a stake in one of the U.K.’s largest malls, said last month that it may set up a separate residential REIT as it acquires housing assets.
Helical Bar Plc (HLCL), which isn’t a REIT, may consider creating one for the residential properties that it’s developing, Chief Executive Officer Mike Slade said in an interview.
The new rules won’t allow the creation of private REITs, according to the Treasury. Closely held real estate companies can qualify for the tax exemptions if they seek to sell shares on a London exchange within three years.
Current rules require REITs to have 25 percent of their shares widely held by investors. Pension funds and life insurance companies may gain exemptions from the rule, the Treasury said without being more specific.
To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net
To contact the editor responsible for this story: Ross Larsen at rlarsen2@bloomberg.net.
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