Clause 65

Part of Finance Bill – in a Public Bill Committee at 5:00 pm on 16th June 2009.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 5:00 pm, 16th June 2009

The origins of the UK real estate investment trust model go back to Kate Barker’s review of the housing market, which recommended that there was merit in considering a vehicle that was based on the US REIT model. Such a model has been introduced elsewhere, as the hon. Member for South-West Hertfordshire rightly mentioned, to encourage increased institutional investment in housing. We implemented that proposal and extended its scope to include commercial property. The main objectives of the model, which was launched at the beginning of 2007, was to promote greater efficiency in property investment and to provide smaller-scale investors with access to commercial property returns.

We have seen that the model works well. Some 21 companies so far have announced that they have become UK REITs, including most of the big listed UK property companies. The scheme is still less than three years old, and we expect other companies to join in the future, as investors become more confident in the UK REIT market.

Effectively, the regime removes the tax distortion between investing in property directly and investing in property indirectly by exempting both income and gains made on property from corporation tax provided that the company or the group meets some specified conditions.

We announced in the pre-Budget report that the Bill would amend the conditions to be met by a company or group in the UK real estate investment trust regime to ensure that those conditions could not be circumvented by the artificial creation of new group structures. The conditions include the requirement that at least 75 per cent. of total profits must come from the rental of property to tenants. We confirmed our intention to legislate in the Budget.

Schedule 34, which is introduced by clause 65, amends part 4 of the Finance Act 2006 to introduce a power for the Treasury to make regulations concerning the use of artificial structures to circumvent the existing UK REITs legislation. The regulations, which are available in draft form alongside the clause, are to be made by the affirmative procedure. Regulations to exclude owner-occupied properties from the REITs regime have also been made using existing powers under schedule 6 to the 2006 Act.

Schedule 34 also amends the 2006 Act so that section 98 of the Income and Corporation Taxes Act 1988 is disqualified for companies or groups of companies seeking to join the REITs regime. That will allow a business with tied premises—a pub business, for example—to treat the rental income from those premises as part of the property rental business of a REIT. Tied premises are those where a company supplies goods to a third party for sale on a premise that the company rents to the third party. Before the amendment, such income would not have been treated as rental income. That created an arbitrary barrier to the REITs regime, which schedule 34 removes.

In addition, following discussions with the industry, schedule 34 makes minor amendments to UK REITs legislation that will have effect on and after 22 April 2009. They address some of the points raised by the British Property Federation, although there are other points that it wishes to promote, a number of which have been mentioned by the hon. Member for South-West Hertfordshire. The minor amendments allow UK REITs to issue an additional type of share; provide a consistent definition of asset; clarify how apportionment of funds between the tax-exempt and non-tax-exempt part of the business should operate; and ensure that the regime’s requirements do not create unnecessary barriers to entry.

The hon. Gentleman asked about the extension to convertible preference shares. The extension allows REITs to use such shares where they previously could not, and is made in response to a consultation with the industry. On the general question whether we can do more to help REITs, it is certainly true that UK REITs, along with other parts of the economy, are struggling in the current economic climate. We have announced a wide range of policies to support businesses through what is a difficult period for them and, indeed, for households. The measures will provide help to all parts of the UK economy, and I expect UK REITs to benefit as well. I am less certain that there is a need for very targeted help for UK REITs beyond what we have done to support businesses in general, but we are very happy to listen to representations that people may wish to make to us.