As part of the government's review of the UK's fund regime, and its wider efforts to enhance the UK's attractiveness to asset managers and investment funds, a number of changes are to be made to the UK's REIT regime with effect from 1 April 2022. Further changes to the REIT rules are likely to follow further down the line as the review progresses.
The draft legislation to implement this first tranche of changes was originally published on L-Day in July as part of Finance Bill 2021-22. We commented on this at the time, but to recap:
- The requirement for the shares in the REIT to be admitted to trading on a recognised stock exchange is to be removed for REITs owned by "institutional investors";
- The rules determining an overseas equivalent of a REIT for the modified close company test for institutional investor-owned REITs is to be amended in a way that will broaden its scope;
- The 'holder of excessive rights' charge is to be removed in respect of investors to whom property income distributions can be paid gross under the UK's domestic REIT withholding tax rules; and
- The requirements to produce financial statements to evidence the balance of business condition are to be relaxed in certain respects, and there is to be an exclusion for profits resulting from compliance with various planning obligations.
We now have a revised version of the draft legislation, which was published on 4 November. While the drafting for items 2-4 is largely unchanged, there have been some modifications to the legislation for item 1 that will make this reform materially more useful.
First, the original drafting required at least 99% of the REIT's share capital to be owned by institutional investors - this has been reduced to 70%, which is a much more manageable/realistic threshold.
Second, as originally drafted, a person acting on behalf of a limited partnership that is a collective investment scheme (CIS) was only considered an institutional investor for these purposes if it met a genuine diversity of ownership (GDO) test (based on the test in the offshore funds rules). It was pointed out to the government that many limited partnerships would not meet this requirement, thereby undermining the usefulness of this reform. The new legislation modifies the GDO test as it applies to limited partnerships in a way that is intended to remedy this in certain cases.
Further, if a CIS partnership does not meet the GDO test, the partners in the partnership are treated as owning their proportionate share of the underlying REIT. In that case, if and to the extent partners are institutional investors, the interests they hold via the partnership will count towards the 70% threshold.
And third, wider 'tracing' provisions have been added to allow institutional investors' indirect interests in a REIT (e.g., via a holding company) to be taken into account in applying the 70% test. No tracing rules were included in the original draft legislation.