Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a special tax structure that allows property rental companies to be exempt from Corporation Tax on their rental income and gains, provided they meet strict criteria and distribute most profits to shareholders. This regime offers significant tax advantages for qualifying property businesses, but comes with detailed requirements around structure, listing, and ongoing compliance.

What is a REIT?

A REIT is exempt from UK Corporation Tax on the income and gains from its property rental business. However, you must still pay Corporation Tax on profits and gains from any other activities outside the property rental business.

As a REIT, you must pay at least 90% of your property rental business income to shareholders each year. Your investors will then be taxed on this income as if they've received rental income from property directly.

A 'property rental business' means you make money from letting land for rent. This does not include income from occupying land yourself. Farming or running a hotel are taxed as trading activities, not property rental businesses, so these do not qualify.

Eligibility requirements

A company or the principal company of a group can apply to become a REIT if it meets all of the following:

• Has an existing property rental business of at least 3 properties
• No single property represents more than 40% of the total value of all properties in the portfolio
• Is UK resident for tax purposes
• Is not an open-ended investment company

Conditions you must confirm

When applying, you must confirm your company meets several specific conditions:

Condition A: Your company is a UK company under section 523(3) Corporation Tax Act 2010. You'll need to provide your incorporation date and company registration number.

Condition B: Your company is not an open-ended investment company under section 236 Financial Services and Markets Act 2000.

Condition C: Your company has shares traded on a recognised stock exchange (with the date they were first traded), or you meet the listing requirement exemptions.

Condition D: Your company is not a close company (broadly, a company controlled by five or fewer shareholders). After the first 3 years of REIT status, you must not be a close company. You will not be considered close if your only participators are institutional investors as defined under section 528 (4A) Corporation Tax Act 2010.

Condition E: Each share issued forms part of ordinary share capital or is a non-voting restricted preference share, and there is only one class of ordinary shares in issue.

Condition F: Your company is not party to loans where the lender is entitled to interest based on your business results or asset values (subject to specific exceptions around reasonable commercial returns).

Excluded businesses and activities

You cannot apply to become a REIT if your business involves:

• Incidental letting of property held in connection with a property trade
• Letting of temporarily surplus accommodation
• Structured finance arrangements
• Owner-occupied property, including intra-group occupation or 'stapled' company arrangements

Specific activities that exclude you from the regime include:

• Caravan sites
• Way leaves
• Siting pipelines for oil and gas
• Mobile phone masts, satellite dishes or similar installations
• Siting wind turbines
• Receiving dividends from another REIT
• Holding an interest in a limited liability partnership (LLP)

How to apply

You must write to HMRC before converting to REIT status. Email your application to reit.lb@hmrc.gov.uk or post it to:

Real Estate Investment Trusts (REITs)

LB North East & Yorkshire

S1775

Newcastle upon Tyne

NE98 1ZZ

Your notice must confirm the name of your company or principal REIT company, state you're giving notice under section 524 Corporation Tax Act 2010 that you wish to become a REIT, and specify from which date you wish to receive REIT status.

You must confirm you meet Conditions A, B, C, E and F (these are legally required). While not legally required to confirm Condition D in your notice, HMRC asks that if you don't yet meet this condition, you provide details of your plans to comply and expected timescale.

You should also provide:

• Whether Condition C is met through listing exemptions for institutional investors
• Confirmation that the conditions in section 529 Corporation Tax Act have been met (if you have an existing property rental business)
• The date by which your accounts will be prepared
• Start and end dates of your first accounting period
• A copy of your group structure (if applicable), including unique taxpayer references, VAT registration numbers, and PAYE scheme references

HMRC will confirm receipt of your notice by email (if you've given consent) or post.

Leaving the REIT regime

You can voluntarily leave the regime by giving written notice to the tax office that deals with your company. You must specify a future date from which you wish to leave, and the regime will cease on that date. If your business continues trading, you'll revert to paying Corporation Tax.

HMRC may withdraw you from the regime if you fail to meet the required conditions or attempt to obtain a tax advantage. The regime will stop at the end of the accounting period before the one in which the triggering event occurred.

You will be automatically withdrawn if you:

• Cease to be UK resident for tax purposes
• Become an open-ended investment company
• No longer meet Condition C requirements (unless joining another group REIT)
• Issue a new class of ordinary shares or shares other than non-voting restricted preference shares
• Borrow on terms giving the lender a share of profits (breaching section 528(8) Corporation Tax Act 2010 rules)

In these cases, the regime ceases from the end of the accounting period before the breach occurs.

Sources

• Apply to be a UK Real Estate Investment Trust
• Investment Funds Manual - Conditions required to remain in the regime

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.