|Previous Section||Index||Home Page|
New clause 9 would compel the Government to introduce tax legislation to facilitate the introduction of real estate investment trusts as a collective investment vehicle for property in the United Kingdom. The
6 Jul 2005 : Column 386
Government have been good at announcing the introduction of REITs, but have so far failed to deliver the goods. As a result, investment has gone offshore.
It should be noted that despite several announcements by the Government of tax legislation to give effect to REITs, such legislation does not appear in the Bill. That is due to problems involving the current method of taxation of overseas landlords, whereby rents payable to them are subject to a 22 per cent. withholding tax except when the landlord has the prior agreement of the Inland Revenue. The worry is that a REIT will effectively escape such a tax when paying a distribution to the overseas landlord. However, many other countries have REITs and have appropriate tax regimes for them.
There is genuine concern that the current position is causing the property fund industry to locate elsewhere. There are now £3 billion-worth of listed property trusts in Guernsey that might otherwise be in the United Kingdom: that has been confirmed by Merrill Lynch investment managers. The quoted property investment trust market has increased from approximately £0.3 billion in 1998 to nearly £3 billion now, going from effectively 0 per cent. to 10 per cent. of UK listed real estate by market value. However, the market value of onshore trusts has remained nearly constant. Virtually all quoted property has gone offshore.
In the United States, REITs are a commonly held investment vehicle. Japan launched them in 2001, France in 2003, and Germany is considering introducing them. It would be preferable if we could introduce a regime before Germany. Companies are effectively developing equivalent structures elsewhere. A major insurer established such a vehicle in Guernsey, complaining that it would have liked at least to have the option of making it a UK vehicle.
In the US, REITs now own no less than $220 billion worth of real estate, of which $35 billion is residential. They have to distribute 90 per cent. of their income, and tend to have far greater and more consistent dividend yields than conventional shares. Given the ageing profile of the British population, that will be important, as pension funds have more retirees than future pensioners making contributions, and seek to move from having assets with potential growth to having income-producing assets.
REITs tend to have different cycles from the bond and equity markets. They therefore make for prudent investment by individuals, pension funds and life assurance companies wishing to reduce risk by maintaining a diversified portfolio. REITs also tend to trade at near asset value, whereas current UK property groups tend to trade at a discount to net asset value, often of between 10 and 15 per cent.
The longer it takes the UK to establish such a vehicle, the lower the tax take will be as more and more vehicles go offshore, and the bigger will be the loss to the UK economy. Perhaps one of the Government's concerns about REITs is that they produce high levels of income, and might be unwelcome competition for the other forms of income-producing investment that investors could consider: for example, the increasing amount of Government debt that the Treasury issues to finance the Exchequer.
6 Jul 2005 : Column 387
If we turn to the history of REITs, the Budget of 2003 included announcements to improve the flexibility and efficiency of the commercial property market. The pre-Budget report of 2003 announced the consultation paper to be produced in the Budget of 2004, following on from the Budget of 2003. In the Budget of 2004, a consultation document was launched promoting more flexible investment in property, and seeking views on how a new property investment funda UK version of the successful US REITsmight be structured to meet the Government's objectives of further enhancing the liquidity of property investment, providing greater access to retail investors and encouraging expansion in the private rented sector. Of course, we have now come to the Budget of 2005.
Accountants and actuaries often identify as one of the characteristics of the Government that Treasury announcements are made without adequate supporting information on which they can make judgments, and often express anxiety publicly about the impact of Treasury announcements that are made without the supporting detail, given all the pressures that result on business and business decisions. It is curious that we have the reverse situation herethe Government have made four announcements about REITs, but no specific date for introducing such vehicles has been brought forward.
The British Property Federation is of the view that there will be no net tax leakage for implementing a REIT regime. The US experience is that REITs pay significant taxes other than corporate tax, such as business rates, stamp duty land tax and VAT, before any shareholder-level taxes. US REITs are widely held, and it should be noted that the US has rules to prevent overseas owners from controlling REITs to avoid US tax. As I shall indicate, Canadian research shows that such vehicles should produce a slight increase in tax yields in the longer term. We are therefore concerned by the Chancellor's reluctance to bear the possible short-term fall in tax revenuesthe determining reason why the Government refuse to introduce REIT legislationwhich is further discouraging capital investment from the United Kingdom.
The US plans to get around concerns about US owners abusing the rules by having concentration limits. Withholding taxes, which were 30 per cent., generally had the habit of blocking and deterring foreign investment that would otherwise be welcome. In the late 1990s, the US Treasury reduced the high withholding taxes on REIT dividends. That applied to all newly negotiated treaties in which withholding taxes were lowered for investments below a certain threshold, typically to 15 per cent. As a consequence, the level of overseas investment in US REITs substantially increased.
It should also be noted that external investors in UK property normally shelter their 22 per cent. tax charge under the current overseas landlord regime, typically by gearing up their investments. A 15 per cent. withholding tax rate would probably levy more tax than the 22 per cent. as the withholding could not be reduced by an overseas investor gearing up to buy shares in the REIT, especially given that REITs have tended to produce considerable income.
6 Jul 2005 : Column 388
The Canadian Institute of Retail Funds and Canadian Institute of Public and Private Real Estate Companies also undertook a very detailed and scientific study of similar issues around withholding taxes for REITs. It concluded that there would be an immediate reduction in tax yields, being the corporation tax forgone on dividends and capital gains, net of the tax collected through withholding. When taking into account that most of the value would generally be deferred to tax residents who would pay tax on their REIT shares and dividends, however, the result was a net increase in tax yields. Overall, therefore, the REIT vehicle would result, at best estimate, in a small increase in tax yields in the long term.
On a wholly dispassionate point, it is difficult for people to retain a satisfactory return on their investments in dividend terms because interest rates throughout the world today are very low, and in many instances lower than in this country. Individuals go into REITs as a form of investment to capture yield. For example, the US experience shows that the average REIT yield in dividend terms is 5.13 per cent., whereas the Standard and Poor 500 stock index yield is 1.8 per cent. It is difficult for people to get a satisfactory return, and this is certainly one way of doing it.
The National Association of Real Estate Investment Trusts in the United States recommends the following, based on the US experience, all of which we could reasonably include in UK tax law. The first recommendation is not to have a quoted requirement for REITs; the second is to permit gearing to reduce the level of withholding tax and distributions payable by REITs, with the sensible suggestion that we should have "safe harbour" levels for effectively tax-deductible debta principle worth considering throughout UK tax law.
|Next Section||Index||Home Page|