A Real Estate Investment Trust (REIT), despite the name, is a company (or group of companies) carrying on a property rental and investment business which, if it meets certain conditions, can elect to become a REIT through a notification made to His Majesty's Revenue and Customs (HMRC).
Why a UK REIT?
UK REITs have been a tried and tested channel for investment in UK real estate since their introduction in 2007 and very broadly, seeks to replicate (from a tax perspective) direct investment in UK property, therefore avoiding the additional layer of taxes that can arise when investing through a corporate structure. This is achieved by a REIT benefiting from certain UK tax exemptions, for example it is exempt from corporation tax on both rental income and gains on sales of investment properties (and shares in property investment companies) used in a property rental business carried on in the UK.
What's Jersey or Guernsey got to do with UK REITs?
There is no requirement for a UK REIT to be a UK incorporated company – a Jersey or Guernsey incorporated company which is UK tax resident can be used, which means that the structure can benefit from Jersey and Guernsey's more flexible company laws as well as UK tax advantages.
Historically, Jersey and Guernsey were popular due to a listing requirement that REIT shares had to be admitted to trading on a recognised stock exchange where institutional investors (such as pension schemes) held 70 per cent or more of the REIT's shares. As a result, The International Stock Exchange, as a recognised stock exchange was a good option for these UK REITs. However, changes to the UK REIT regime have relaxed or removed a number of barriers to entry (including removing the listing requirement detailed above) to broaden its appeal to investors.
However, there remain very good reasons to use a Jersey or Guernsey company as your REIT vehicle.
What are the key benefits to using a Jersey or Guernsey company?
In addition to the tax benefits flowing from REIT status, there are benefits to be gained by setting up a UK REIT as a Jersey or Guernsey company which is UK tax resident:
- Jersey and Guernsey company law is founded on the same underlying principles as English company law, so they have familiarity but also some additional flexibility.
- Establishing UK tax residency for a Jersey or Guernsey company is straight-forward – Jersey and Guernsey companies can be tax resident in the UK by locating their "central management and control" in the UK, which broadly involves board decisions being made in the UK and having a majority of UK tax resident directors. UK tax residence allows the Jersey/Guernsey tax residence to be switched off, so that a Jersey/Guernsey incorporated REIT can be solely tax resident in the UK.
- UK company law requires that distributions are made only from “distributable profits”, whereas directors of Jersey and Guernsey companies are able to pay a dividend provided that the company is solvent immediately after the payment of the dividend and the other applicable requirements of the solvency test set out in the relevant jurisdiction's company law are otherwise met.
- The Jersey and Guernsey company regimes also allow for great flexibility in paying out capital, with reductions of capital, redemptions and share buybacks all being possible with the requirement that the company is solvent immediately following the capital reduction, redemption or buyback. Financial assistance is also permitted.
- Provided the share register of the REIT is retained outside the UK, transfers of shares in the REIT can be made free of UK stamp duty or stamp duty reserve tax.
- Both Jersey and Guernsey allow companies to issue no-par value shares. Mergers and amalgamations of Jersey and Guernsey companies are also possible.
- Other legal benefits of using Jersey and Guernsey companies include separate legal identity, limited liability for shareholders and ease of transfer of ownership.
- Although not 'legal' benefits, Jersey and Guernsey offer:
- Excellent quality of professional service providers;
- London time zone and connections; and
- A politcally and financially stable environment and a well-developed legal regulatory framework.
