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 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 identified 1. Improving efficiency of property investment 2. Expanding access to a wider range of investors 3. Ensuring fairness for all taxpayers 4. 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 Investor Investor 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.