Real estate investment trusts

Real Estate Investment Trusts (REITs) are a new tax-efficient vehicle that, from 1 January 2007, will allow property investment companies to offer shares to the public. In 2005, the Government announced plans to introduce this investment regime in a bid to improve the efficiency of both the commercial and residential property investment markets.

Within this asset class, property investment companies can operate in a more tax efficient manner and those companies that meet the requirements set out in the legislation would be able to apply for REIT status for accounting periods beginning on or after 1 January 2007.

This new regime is likely to affect various types of property owners and investors, ranging from public sector organisations to asset-rich individuals. There are also choices and options for those who don't or can't become REITs.

REITs will benefit from a tax regime whereby rental income and gains on disposal of assets used to generate that income will be exempt from corporate tax. The remainder of the company's income – such as interest income, rent from letting property intra group, income distributions from other REITs and trading income – will be subject to corporation tax of 30%.

While becoming a REIT may be a straight-forward process, retaining REIT status has its challenges. There are no restrictions on the sector from which a company comes from, however, asset-rich companies that use properties for their trades – such as pubs, hotels and retailers – will have to separate their property and operating activities, as rents from owner-occupation is not permitted.

Property investors wishing to speculate on this new asset class can use their ISA limits to invest in REITs, while those investors with more money to commit can turn to the stock market which would give them access to a regulated market that may be more attractive than other forms of investment.

This new opportunity is likely to help businesses operate more effectively in the market place, however, there are options available to those companies that do not wish to convert to REIT status, such as aggregation and divestment.

PricewaterhouseCoopers' Real Estate Network can provide training, support and advice on all aspects of setting up and running a REIT.