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OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

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Page 1: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Recent developments in the UK: immoveable property regimes

Michael Fekete, HM Treasury

Page 2: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

UK commercial property investment = c.£250bn

Size of UK property investment market, £bn

0

10

20

30

40

50

60

70

80

Pension andLife funds(direct)

Listedcompany

Unlistedcompany

Pooled funds Overseas(direct)

Other LimitedPartnerships

Type of vehicle

£ b

illio

n

Source: IPF research 2005

Page 3: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

UK tax reform to improve efficiency of property mkt

• First launched consultation in 2004

• Key Government objectives identified1. Improving efficiency of property

investment2. Expanding access to a wider range of

investors3. Ensuring fairness for all taxpayers4. Improve flexibility for tenants

• Focused on common concept of a REIT

Page 4: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

What are the market inefficiencies in the UK?

• Property is unique in one sense – can be held as investment either directly or indirectly.

• Current tax system affects investor’s decision.

• Quoted property company sector in decline.

• UK-REIT aims to remedy this by aligning the direct and indirect taxation of rental income.

Page 5: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Most REITs globally are company structures?

Company

Distribution

InvestorInvestor taxed when receives distribution

rental income

Company not taxed on rental income

Company not taxed on capital gains from sale of investment properties

Tax investor at point investor sells shares

Aim is to tax the investors as though they were investing directly

Page 6: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Current proposed rules for UK-REIT regime

• Company listed on Recognised Stock Exchange.

• At least 75% of income and assets must be ‘property rental’

• Exempt from corporate tax on this ring-fenced income but must distribute 95% of net profits to investors.

• No shareholder more than 10% holdings.

Page 7: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Interactions with Double Tax Agreements

• Starting principle is country with source of property income has primary taxing rights.

• OECD model Article 6 : direct investment.

• Property is ‘lumpy’ asset so indirect investment may offer better opportunities e.g. company.

• Significant history of taxing the distributions from companies: i.e. dividends (Article 10).

Page 8: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Taxation of dividends in REIT models

Company

Distribution

Investor

Overseas investors receive ‘dividends’

rental income

UK investors receive ‘property income distribution’

Common treatment of dividends is a challenge to REIT principle

Page 9: OECD Roundtable, 1-2 February 2006 Recent developments in the UK: immoveable property regimes Michael Fekete, HM Treasury

OECD Roundtable, 1-2 February 2006

Looking to the future

• Property is unique (direct vs. indirect).

• Challenge for tax treaties to accommodate income from property and property market issues.

• OECD model could offer some clarifications on how REITs globally are treated.

• REITs are an example of use of corporate structures for collective investment.