Amendments to the UK's Real Estate Investment Trust (REIT) regulations have been introduced in the new Finance Bill 2023-2024, which is expected to be passed into law in summer 2024. The amendments, announced on 29 November 2023, reaffirm a number of measures announced by the UK. We reported to the UK Government when the first draft of the Bill was published in July 2023, which also included a number of further changes to REIT regulations.
Major changes
The main changes can be summarized as follows:
- Condition D of the REIT Regulations requires that REITs be non-closed or only closed as a result of institutional investor participation. This condition is modified to ensure that it is also met by indirect ownership by institutional investors.
- Unit trusts, OEICs, and limited partnerships qualify as institutional investors only if they meet the non-familiarity condition (i.e., they are not intimate companies, or if they are a company, they are not intimate).
- A company will not be considered close simply because the manager of a collective investment vehicle or the general partner of a limited partnership that is a collective investment scheme holds 50% or more of the voting rights. Furthermore, residence outside the UK does not prevent a company from obtaining similar qualifications.
- Disposals of UK property-rich shared ownership licensed contract schemes will also now enjoy exemption from tax on profits.
- “property financing costs” means costs that are referable to a UK property rental business for the purposes of the interest cover test, but do not include non-deductible costs;
- The definition of 'group' will include insurance companies that hold a 75% or more interest in a group UK REIT.
- The definition of “relevant time” in the context of determining whether ownership of a single commercial property satisfies the real estate rental condition is: will be corrected so that it is satisfied. The relevant period (latest of property entry and acquisition) is at least £20m.
The Finance Bill 2023-2024 had its second reading in the House of Commons on 13 December 2023 and was considered in committee on 16 January 2024. Commons report stage and third reading in the House of Commons is scheduled for 5 February 2023.
After the Feb. 5 reading, investors and advisors expect further changes to the REIT regime to be announced in 2024, particularly the true ownership diversity rules, three-year This relates to the relaxation of rules regarding the disposal of real estate within the country. Developments over the years and changes in withholding taxes on distributions.
final thoughts
The proposed changes are a valuable incentive for real estate investors and are also highly relevant for lenders. Lenders may be required to agree to changes within the structure in line with legislative changes. We will continue to report on these changes and how lenders are working with borrowers to ensure appropriate consents are given under financial documentation to avoid technical breaches and gaps in security packages. We will discuss whether it should be done.
The proposed changes to the UK REIT regime come in light of the UK Government's decision to refuse to introduce legislation for a new tax-transparent, permissionless vehicle known as a Retained Investor Fund, at least at this stage. This will make it all the more welcoming. Significant discussions regarding the Investor Retention Fund continue between advisers and the UK Government following the 2023 Public Policy Consultation, but developments in this area during 2024 will need to be watched.
