Property Investment Trusts and Accounts

By: Scott McBride - Updated: 28 Sep 2012 | *Discuss

 

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There is a way to invest in property without actually buying one. Real estate investment trusts (REITs) are already popular in the USA, Japan, Australia and France, and were launched in the UK at the start of 2007.

In simple terms, a REIT is a company that owns and operates income-producing real estate. This can be either commercial or residential property. By owning shares in a REIT, an investor can buy into various types of property without the work and hassle involved in actually buying a building. The REIT will pool the money invested by shareholders and invests in properties that are then leased, so it is similar to buy-to-let but on a far bigger scale. An added bonus is that there is no need to find a tenant, collect rent, pay for repairs and insurance or employ a letting agent.

This type of investment can give instant access to a portfolio of buildings. It means that instead of risking all their funds on the purchase of a single property to let, the investor can spread risk across a number of properties through a REIT.

Know the Risks

There are still risks involved, however. As with investment trusts, REIT shares are traded on the London Stock Exchange. Many people's main investment is their home, and if the majority of their stock market investments are in property too they are in danger of putting all their eggs in one basket. In this case, there is an obvious risk from any problems in the property market - their home could lose value and so could their shares in the REIT.

However, the same risks are taken by anyone investing in buy-to-let properties, and when it comes to selling the investment it is far easier - and less expensive - to sell the units in a REIT than it is to sell a house.

The trusts will aim to pass on returns at the same level as investors would see if they owned the properties directly. This is achieved by removing the requirement for companies to pay corporation tax. In the UK, REITs can apply for UK-REIT status to become exempt from corporate tax, and this removes the effect of double taxation at both corporate and investor level.

Tax on REITs

Property rent must account for at least 75 per cent of the income of a REIT, and this part of the business is tax-free. The remainder of the business is taxed as normal. Income and capital profits from a REIT's tax-exempt business is classed as taxable income when passed on to individual investors. The REIT deducts income tax at source, but shareholders can reclaim the tax by investing in an individual savings account (ISA) or pension. Any income and capital profits from the REIT's non-exempt business is treated as dividend income when passes on to individual investors.

Many REITs invest heavily in commercial property, such as cinemas, industrial units, shopping centres and office buildings. It means that for a modest outlay of around £1,000, investors can buy a direct stake in high-profile developments. REITs can also invest in residential property, however, and one of the ideas behind their launch was to promote investment in British property as part of a wider plan to increase the supply of housing in the UK.

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