UK REIT Rules Relaxed to Allow Stock Dividends

The Government yestersday (24 March 2010) announced a measure to allow UK Real Estate Investment Trusts (“REITs”) to issue stock dividends in lieu of cash dividends when meeting the 90 per cent distribution requirement. A group which has elected to join the UK-REIT regime is exempt from corporation tax on profits and gains arising to its ‘property rental business’. In order to be within the regime, the UK-REIT needs to meet a number of complex conditions including distributing 90 per cent of its property rental income to shareholders. UK-REIT shareholders are taxed on the distributions as although income arose from direct property investment rather than generally more favourable treatment of dividends from other listed companies; this recognises that, unlike other listed companies, the UK-REIT is exempt from corporation tax. Currently stock dividends are not classified as property income distributions for this purpose, however it was announced that a measure of relief will be included in the first Finance Act after the General Election to include stock dividends for the purposes of the distribution requirement. Shareholders receiving such stock dividends will be subject to tax in the same way as other property income distributions. Paul Braye, Tax Principal at BDO LLP in Southampton commented: “This measure will be welcomed by the listed property sector who have long made the case for this change. A UK-REIT will now have the flexibility to be able to meet its distribution requirement by way of a stock dividend, thereby protecting their cashflow.” -Ends-

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