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This article appeared in the Yorkshire Post on Saturday 21st January, 2006. G & E Taxing Times - Fresh Pensions Hope After SIPPS Blow
Last year there was a lot of excitement about the possibility of putting residential property investment into a pension scheme. The new style SIPP (Self Invested Personal Pension) was due to take effect from April, until the Chancellor dropped the bombshell and revealed that he had changed his mind. However, he did raise the prospect of allowing pension schemes and other investors to put their money into UK Real Estate Investment Trusts (UK REITs). REITs have been under discussion for some time, but draft legislation has now been produced, setting out the Government’s intentions. The idea is to introduce a form of investment trust to make it easier to invest in property, expand access to a winder range of investors, ensure fairness to all taxpayers and improve flexibility for tenants, while protecting the Exchequer. The Government is consulting on the proposal and if they decide to go ahead REITs could be introduced in January next year. So what type of vehicle will you be able to invest in? REITs will be companies resident in the UK that are publicly listed on a Stock Exchange. They will have to carry on a qualifying property letting business, but will also be allowed to have other business activities. This will be with the proviso that at least 75 percent of the UK REITs activity relates to the qualifying property business. The REIT will have to satisfy Revenue and Customs on this, with reference to both its total income and assets. The next question is, why should you want to invest in a REIT? We are looking at the tax advantages here, and not at the broader investment aspects, on which you must, as ever, seek personal specialist advice. The main tax point in favour of a UK REIT is that it will pay no tax at all on its profits from investing in property. Instead, you as the investor will pay income tax on distributions that you receive from the REIT. I use the word “distributions” rather than “dividends” here, because the tax treatment will be subtly different. This will be a more confusing tax regime for the personal investor than the system of taxing dividends from public companies with which you may be familiar. The REIT will deduct tax of 22 percent at source on distributions out of qualifying property income and a dividend tax credit of one ninth for other income. In either case, the investor will then be liable for tax at his or her marginal tax rate. Having established its qualifying property business, every UK REIT will be required to distribute at least 95 percent of its net property rental profits to investors – who will pay income tax at their marginal top rate of tax. However, and this is where the tax advantages lie, no REIT will have to pay out the profits it makes from selling properties at a capital gain. The effect is that those capital profits can roll up gross within the REIT, and so the fund can grow at a correspondingly faster rate. Shares in a REIT will be available to ISAs, PEPs or Child Trust Funds, subject to the normal limits and rules, so as to generate income within those systems that is not liability to tax. This is in addition to the suggestion that pension schemes can invest in them. The Government are wary of people using UK-REITs for tax avoidance, and so they intend to restrict ownership of a REIT so that no person directly or indirectly controls 10 percent or more of the shares or voting rights. From the investor’s point of view, this appears to rule out take-overs of REITs. However, the bit potential disadvantage in the UK REIT regime lies in the tax charge that a company converting to REIT status may have to pay. No details are available on this yet. You may think this is not a concern to you as an investor, but, of course, tax paid by a company in which you have invested does, in effect, reduce the value of your investment. If the conversion charge is too expensive, then those existing quoted property companies that have been looking at REIT status may decide not to convert. The plus points for the proposed investments appear to be:
The above proposals could alter after a period of consultation, but are due to commence for the accounting periods beginning on or after 1 January 2007. Alex Houghton is a senior tax consultant at Garbutt & Elliott, Chartered Accountants: 0113 273 9600 and 01904 464100, or ahoughton@garbutt-elliott.co.uk
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