New obstacles trump government REITs plan

Property businesses are unlikely to take up Real Estate Investment Trust
status if the current plans go through, a senior adviser to the project has
said.

Ros Rowe, tax partner at PricewaterhouseCoopers and a member of the industry
working group advising the government on the plans, has warned that key elements
will not work.

‘REITs have been widely welcomed within the property sector, but some
proposed rules in the consultative document are far from ideal. The government
should consider amending those rules to ensure there is a healthy take up,’ she
said.

Among rules that are causing difficulty are those on gearing. The draft rules
stipulate that interest payable by the trusts must be covered two and a half
times by the REIT’s profits.

‘A two and a half ratio seems a bit harsh,’ John Whiting, tax partner at PwC,
said.

PwC has conducted research into whether businesses would be likely to covert
to REIT status. The gearing ratio is designed to prevent the REITs offsetting
interest against profits.

If the REIT has no profits, it does not have to distribute its income, and
the Treasury fears that the trusts could be used by people simply to roll up
income tax free into a capital sum.

Of respondents to the PwC survey, 84% said that they were concerned about
this gearing level issue.

Other features of the proposals that aroused comment were the distribution
requirement (which only 17% thought was reasonable), and the limitation on
shareholdings to 10% or less (where 47% felt that this would constrain them from
investing in a REIT).

The results are likely to worry the Treasury, which is keen to create an
efficient structure without developing the potential for huge tax avoidance.

Before the proposals were announced, there were fears about foreign investors
taking income from property investments tax free as a result of the trusts.

The consultation on the trusts ended last week, with final details expected
at Budget time.