From the date of Royal Assent to Finance Act 2012, the charge of 2% of the market value of assets on entry to the REIT regime is to be abolished. Alongside other relaxations of the conditions, companies traded on AIM and certain other platforms will be permitted to become REITs.

Baker Tilly analysis

In our response to the consultation on REITs earlier in the year (a copy of which may be downloaded from here) we welcomed the proposals now being legislated and, therefore, consider that this represents an exciting opportunity for expansion of the REIT market. In particular, we expect the abolition of the entry charge to encourage existing REITs to make corporate acquisitions while the relaxation of the listing requirements will be a significant incentive for all property investment companies on AIM etc. to convert to REIT status. In addition, the relaxation of the close company requirements should be a significant help to those seeking to bring new REITs to market.

In detail

Following the consultation on changes to the REIT regime earlier in the year, draft legislation has been published to give effect to a number of the proposed changes from the date of Royal Assent to Finance Act 2012.

• Entry charge - The current charge of 2% of the market value of properties on conversion will be abolished.
• Listing requirement - These are to be replaced by a requirement that their shares are admitted to trading on a recognised stock exchange and are actually traded. Companies with shares traded on AIM and other similar trading platforms will now qualify for REIT status.
• Close companies – A three year grace period will be introduced during which a REIT can be a close company. Promoters will therefore be able to bring REITs to market and then obtain external investment. However, a breach after the grace period will mean expulsion from the regime. Institutional shareholders such as pension funds and unit trusts will no longer count when assessing whether or not a REIT is a close company.
• Cash  - Cash will be permitted to be exempt assets for the purposes of assessing the requirement that REITs cannot hold in excess of 25% as non exempt assets.
  Interest Cover – In future only loan interest will be used for calculating the interest cover of a REIT. Other ‘finance charges’ for accounting purposes such as arrangement fees will be excluded. Further, any amount taxable as a result of a breach will be limited to 20% of the otherwise tax exempt profit.
• Distributions – REITs are to be permitted to distribute 90% of their tax exempt income profit within an increased time limit of 18 months after the year end.