Consultations & legislation
REITS informal consultation – Government feedback
13 October 2011
HM Treasury's informal consultation exercise on changes to the Real Estate Investment Trust (REIT) regime proposed at Budget 2011 concluded over the summer. The consultation was undertaken in line with the Government’s tax policy framework which aims to increase the predictability and stability of the tax system and improve consultation and scrutiny of the proposed changes. Consistent with those aims, I hope it will be helpful to give you a broad overview of the results of the consultation ahead of the publication of draft Finance Bill clauses on 6 December.
Stakeholder response to consultation
The informal consultation closed on 10 June 2011. We received 53 written responses from a wide range of interested parties (REITs, house builders, fund managers and property investment companies). We also conducted around 20 meetings with a range of stakeholders. Without exception all stakeholders saw the measures announced as a positive step.
Overview of consultation outcome
Each of the changes proposed are set out below, together with a summary of feedback received and the approach now proposed by HM Treasury.
Abolish conversion charge for companies joining the REIT regimeAll stakeholders were fully supportive of this reform. HM Treasury has agreed that this charge will be abolished.
Relax listing requirement to allow listing on non regulated stock exchangesThe consultation highlighted that this would lead to increased accessibility to markets for start ups and smaller companies (because it is possible to raise small amounts of capital at a cheaper cost). In addition, this would mean less onerous rules relating to trading history, and lighter governance and reporting requirements which means that ongoing running costs are also reduced.
HM Treasury has agreed that REIT regulations will be loosened to allow listing on AIM and PLUS markets and their foreign equivalents. (Note this measure does not allow the establishment of private REITs.)
Introduction of fixed grace period for meeting the non close company requirementStakeholders raised four main issues in their responses : the length of the grace period; the possibility of discretionary extensions; clarification on penalties if the close company rule is not met at the end of the grace period; and the interaction of the measure with the listing requirement.
Taking into account all the representations made, HM Treasury has agreed the following measures should be taken:
(i) That the length of the grace period will be for three years;
(ii) There will be no discretionary extensions;
(iii) If the close company rules are not met by the end of the grace period, for legitimate reasons, then the company will lose its REIT status without any further penalty. If, however, a company fails to meet the non close company requirement and it is deemed to have joined the REIT regime to gain a tax advantage, then existing legislation will be invoked; and
(iv) On the interaction with the listing requirement, a new REIT taking advantage of the non-close company grace period may still be eligible to list on AIM or PLUS provided they are able to meet the requirements of the AIM or PLUS regime (and thereby benefit from the lower costs of so doing).
Stakeholders were supportive of this measure on the basis that it will make investment easier for institutional investors, thereby enlarging the pool of potential investment in property. HM Treasury will take this reform forward. The detailed provisions will be available for technical comment when published in draft on 6 December.
Allow cash to be a “good” asset for purpose of meeting the balance of business asset test
Stakeholders were supportive of this measure as it will allow them to make spending decisions that are commercially based rather than tax based.
This reform will be taken forward by HM Treasury and the detailed provisions will be available for technical comment when published in draft on 6 December.
The industry supports changes to this measure so that it is interest paid on excessive borrowing that will be measured in the test rather than the total finance costs incurred in borrowing.
HM Treasury will take this reform forward and the detailed provisions will be available for technical comment when published in draft on 6 December.
Extension of time limit for complying with the distribution requirementIndustry said that the current three month extension is burdensome for REITs operating on a six monh dividend cycle and they have asked that the time limit be extended. HM Treasury agrees that the time limit should be extended to six months. The detailed provisions will be available for technical comment when published in draft on 6 December.
Next steps
We are not seeking further representations on these matters, though as set out above we will welcome views on the drafting of the detailed provisions to ensure it is fit for purpose before inclusion in Finance Bill 2012.
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