REITs – monitoring compliance and maintaining REIT status

The UK launch of real estate investment trusts (REITs) has opened up new opportunities for companies and individuals who invest in property to do so in a more tax-efficient manner.

Many companies, having completed the process of converting to a REIT, are now faced with the equally challenging task of establishing best practice and embedding the new regime into their day-to-day practices in order to ensure that they retain their REIT status.

Since the introduction of REITs on 1 January 2007, PricewaterhouseCoopers specialists have helped many companies to navigate the conversion process and therefore benefit from the favourable tax opportunities that exist within the REITs regime.

Broadly, UK REITs are required to pay out 90% of their rental income (as defined) in the form of dividends, known as property income dividends (PIDs). Other conditions for acquiring REIT status include:

• The company must have at least three properties throughout the period
• No single property should exceed 40% of the value of the properties using GAAP
• The properties must not be owner-occupied

There are also tests to be satisfied in respect of the type of income and assets held by the REIT, the amount of debt financing used, and payments of dividends to certain shareholders.

With the strict entry requirements and the associated costs of acquiring REIT status, the risks of then falling out the regime are high. It is for this reason that companies are encouraged to begin thinking about the issue of compliance and monitoring compliance with the REIT conditions as early as possible before the year-end date.

Newly-converted REITs should be in a position to address the following key questions:

• Have you thought about tax compliance going forward?
• How do you intend to meet compliance filing obligations under REITs status?
• Have you considered how to deal with different areas such as PIDs and non-UK profits?

Some areas of the REIT guidelines remain complex and the industry is awaiting HMRC clarification on a range of issues. To help address these areas of uncertainty, PwC specialists are working with HMRC to clarify the guidance and help REITs to understand what their obligations are.

Although it may be some months before the compliance deadline comes into play, companies should begin dedicating some resource to establishing how they intend to manage their REIT status. Such considerations should include establishing and embedding best practice.

Companies should also aim to put in place tools and systems for managing their compliance process, including sourcing the software to help perform the necessary calculations, update checklists, delegate tasks, and manage documentation.

At PwC, our specialists work with companies to design and implement best practice at each stage of the planning and compliance cycle. We are able to assist clients with the sourcing and implementation of software to help manage the compliance task, while simultaneously saving time and increasing accuracy.