Finance (No. 2) Bill
Christopher Leslie (Nottingham East, Labour)
We have tabled an amendment to schedule 4, which relates to real estate investment trust arrangements, particularly regarding the proposals to facilitate the payment of dividends through stock issue. For the aid of the Committee, I should set out that real estate investment trusts are tax-efficient mechanisms through which investors in commercial or residential property can conduct efficient business. They ensure that the property rental income has tax paid on dividends but that the business does not need to pay corporation tax or capital gains in certain circumstances, thus making it easier for investments to be made in shares in firms holding property assets. By and large, the retail estate investment trust regime, which the Labour Administration were party to developing, has been very beneficial.
There might well be a variety of REITs that focus on specific areas such as office space or retail outlets. Legislation stipulates that a real estate investment trust must have three or more properties in its portfolio, with each accounting for no more that 40% of the ring-fenced assets. Obviously, that is to ensure that there is a basket of properties in a genuine portfolio to ensure that there is a spread available for people to invest in. Properties in REITs must not be owner-occupied.
A shareholder in a listed British property company faces double tax. The company pays corporation tax on its property-related business activities, while the investor pays tax on dividends and capital gains. Real estate investment trusts do not pay corporation tax on their ring-fenced assets—profits arising from property-related activity, such as earning rent—as long as at least 90% of their profits are distributed to shareholders as dividends, which brings us to the point of the clause. Taxpayers will pay more tax on dividends paid by a REIT than they do on a dividend from a non-REIT share. Each such dividend distribution is known as a property income distribution—PID. A PID will be taxed as property letting income and paid after deduction of tax. A basic rate taxpayer will pay 20%, so for every property income distribution of 100p, they will receive 80p but, on the other hand, a higher rate taxpayer will be taxed at 40% or, I presume, even at 50%. The reliefs are therefore commensurate. Shareholders who do not pay tax at all can reclaim the difference.
It is expected, however, that due to the tax benefit to the company itself, dividend payments are typically higher, offsetting the higher level of tax paid by the investor, so in the long and short circle of life of a REIT, it is still comes out as a more efficient tax arrangement. Will the Minister explain why the property income distribution is set at 90% of profits and not lower than 90%, or at 95% or 100%? I would like to know the logic behind that figure. Would a lower distribution requirement incentivise reinvestment in the quality, fabric and maintenance of the property stock? In other words, would not a facility to encourage reinvestment be in the long-term best interests of land and property values across the UK?
Christopher Leslie (Nottingham East, Labour)
It was a reform. There were other grand reforms that the previous Administration put in place. I might well consult my colleagues, but given that the clause is before us today, I felt that it was reasonable to ask the Minister to help the Committee on the 90% figure.
I have another question that might be even more academic in some respects: to what extent does the Minister assess that the REIT arrangements have affected property price inflation more generally in our economy, given that commentators have voiced concern more generally about the role that property plays in our economy? Obviously, a lot of inflation took place before the REIT regime was in place. However, what part has the regime played, particularly given that commercial property and its direct purchase is hugely expensive and complicated? Has opening an opportunity for investors to take a stake in areas of property that were hitherto inaccessible fuelled some of the price inflation?
Property is not a liquid investment on many occasions, but buying REIT shares rather than actual properties can give the investor greater flexibility to move in and out of the asset class—that is generally to be welcomed—just like trading a share online or via a broker. Does that extra liquidity create a multiplying or magnifying effect on prices? What analysis has the Treasury made of that when considering the thorny issue of particular asset class inflations and, as some have said, a possible historical property bubble? I do not wish to comment one way or the other on whether that is the case, but I hope that the Treasury can analyse the effect of the tax rules on the market in general. I will be grateful if the Minister can answer my points.
Justine Greening (Economic Secretary, HM Treasury; Putney, Conservative)
It is a pleasure to serve on the second Finance Bill of the year under your chairmanship, Mr Caton.
I shall remind the Committee, as the hon. Member for Nottingham East started to, what clause 10 and schedule 4 will achieve. I will then do my best to answer his questions—perhaps that will give more background.
Clause 10 loosens the requirements for real estate investment trusts by allowing amended distribution rules. At the moment, REITs are required to distribute 90% of their profits from their tax-exempt property business each year in cash. REITs were set up in about 2004 under the last Government when this issue was first identified in order to offer different treatments for people who wanted to put investment into property between those who did so via a company and those doing so directly. At the time of their establishment, there were several facets to desired outcome. First, it was about creating liquidity. Secondly, it was about improving investor access. There was a sense that we needed to bring money into the housing industry to create more housing, improve economic stability and so help to stabilise the property investment market by rebalancing some debt with equity among property companies. There was also the desire to create more efficiency in terms of the tax issues that have been discussed. It was also hoped that REITs would improve the housing market by creating a better chance of fostering enhanced professional management of the private rented sector. In fact, those tax rules were largely successful because by the time of their introduction in around 2007, an awful lot of rental property management companies went under the REIT tax status.
The question then was to what extent we could improve the REIT status to make it more flexible for companies. At present, unlike other companies, as the hon. Gentleman said, REITs can only distribute dividends in the form of cash dividends. So clause 10 effectively gives them the flexibility in making distributions from their tax-exempt property rental business and, in particular, in meeting their profit distribution requirement. So it will help them to preserve capital, which is important for all companies, including REITs, in the current economic climate, given that we regularly discuss in the House how difficult it is for businesses to access new capital. The Government are also satisfied that this will not affect investors because they can still choose to receive their dividend in cash if that is what they want.
As the hon. Gentleman will be aware, we put a draft Finance Bill out for consultation and following representations from organisations such as the British Property Federation, which overwhelmingly welcomed these changes to give REITs more flexibility—in itself welcome—we decided to loosen the use of stock dividends by REITs. So, rather than allowing them to issue a proportion of stock dividends instead of cash dividends, it seemed far simpler for REITs in terms of both flexibility and bureaucracy to allow them to distribute all their dividends as stock rather than cash dividends. As I said, ultimately that will be an option for shareholders. If they wish to continue getting cash dividends, they can do so.
To answer the hon. Gentleman’s question about the distribution rate, it was set at 90% to ensure that there was no revenue cost to the Exchequer: although we were facilitating more investment into the property sector, which is needed if the numbers of houses that we all want are to be built, it would not be at a cost to the Exchequer. If we lowered that rate, it would potentially have an impact on the Exchequer, but as I am sure the hon. Gentleman remembers from his time in government, the property industry will clearly continue to make its representations about how it sees REITs being further developed in future.
The hon. Gentleman’s final question about the impact of the tax status of REITs and how that has affected the property market is interesting. REITs were established as a means of facilitating more investment with the aim of incentivising more house building of properties for the rental sector. I do not have the analysis in front of me today, but I should have thought that, if anything, the tax change would have had more of a downward than an upward pressure on property. Ultimately it is difficult to assess a particular change to tax in a particular part of the property market that clearly includes other stakeholders such as the construction industry. Then there are demographic changes, regional pressures and the broader economic climate to take into account. It is quite difficult to give an answer one way or the other.
Certainly, the extent to which this legislation facilitates more investment in property opens up the investment that we need to get more homes built for people. One of the main reasons that property prices have an innate upward push is this gap between demand and supply. Hopefully, this measure will ensure that we get investment coming into the sector so that we can minimise the risk of the gap growing, which is something that Members on both sides of the House are concerned about. I hope that I have answered the hon. Gentleman’s questions.
Christopher Leslie (Nottingham East, Labour)
I am grateful to the hon. Lady for her answer. Broadly, I agree with many of her points, and it is helpful to have that clarification. Other changes affecting the property market include slashing the social housing budget in half, which I gather she and her colleagues will probably do tomorrow. Such a move will not do anything to help with the supply of housing stock across the country, but I suspect that that is a debate for another day.