Real-Estate-Investment-Trust.co.uk

The guide to investing in Real Estate Investment Trusts in the United Kingdom

UK-Real Estate Investment Trusts Investor Benefits

Portfolio Diversification for Small Investors

UK-REITs foster the ‘democratisation of property’. Part of the motivation for creating REITs was to permit individual investors to access property in a relatively straightforward manner. Currently small investors have very limited access to property investment. Many have tried the buy-to-let route but such investment tends to be highly concentrated in the residential sector and small investors have little choic but to be highly geared with substantial borrowing against the property. REITs will open up opportunity for small to be invested in the commercial as well as the residential secor and to diversify across different geographical locations. Indeed, it is reasonable, if perhaps oversimplified, to consider REITs to be mutual funds that hold property rather than financial assets. REITs and other combined vehicles allow the benefits of property investment to be widely accessed.

Tax Treatment

REITs significantly reduce and even eliminate income taxes on earnings that would otherwise be levied at the corporate level. Qualified income passes through the REIT to shareholders. Taxable investors are liable for taxes on dividends and capital gains received. At present double taxation is a major problem for investors in property companies. Shareholders in property companies are taxed twice, once as shareholders and once as a property company. While the property company pays taxes on profits and capital gains, shareholders pay tax again. REITs would effectively remove the property companies requirement to pay taxes provided 95% of the income is passed directly through to shareholders.As a result, REITs seem to provide little incentive to construct elaborate and opaque internal workings aimed at minimising corporate-level taxes. Investors benefit from this transparency. From a government perspective, however, there is likely to be a loss of revenue which it will offset by introducing a one-off tax to recoup lost Capital Gains Tax from companies switching to REITs. The level of that one off tax is unlikely to be revealed until the March 2006 budget. It is the level of that tax that will determine the number of property companies that switch to the UK-REIT structure and thus determine the strength of the sector.