Investment companies that invest in property may or may not be structured as UK Real Estate Investment Trusts (UK REITs). When the term REIT is used in this guide, it refers to UK REITs.
REITs are investment companies that:
- Own commercial or residential property and rent it out
- Are obliged to distribute 90% of the profits they make from their rental business to shareholders
- Do not have to pay corporation tax on profits from the rental business
Shareholders in REITs pay income tax, not dividend tax, on distributions that are made in this way. The general idea is that they are taxed as though they owned the properties themselves. Of course, if REIT shares are held in a tax wrapper such as an ISA or SIPP, no tax is paid on the distributions, making REITs a tax-efficient way to invest in property.
Because of the tax-efficiency of the REIT structure, almost all investment companies that invest directly in UK property have elected to become REITs.
REITs may be incorporated in the UK, or in other locations such as the Channel Islands. Wherever they are incorporated, they are treated for tax purposes as if they were based in the UK, with one exception: there is no stamp duty to pay when buying shares in non-UK investment companies.
Other property investment companies
Not all investment companies that invest in property are REITs. Generally speaking, if investment companies invest in non-UK property, they will not use the REIT structure. The same is true for investment companies that invest indirectly in property, through property shares.