oecd roundtable, 1-2 february 2006 recent developments in the uk: immoveable property regimes...
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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
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
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.
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
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.
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).
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
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.