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Over the past few years, the Government has sought to address practical issues within the UK’s Real Estate Investment Trust (REIT) legislation in order to make the regime more accessible and less burdensome via changes introduced by Finance Acts 2022 to 2024. An overview of the UK REIT regime can be found in our recent factcard.

HMRC’s guidance in respect of REITs has now been revised to reflect these legislative amendments and provides additional clarity in certain other areas. Numerous updates have been made to the guidance. We have noted some of these below.

A key condition of the REIT regime is that the principal company of the REIT group should meet the non-close condition. Broadly, in order to satisfy the condition, a company must not be close or be close only because it has an institutional investor as a participator (‘institutional investor carve out�). The rules in this respect were amended by Finance Act 2024 to allow tracing through to institutional investor(s) via intermediary holding entities. Additional commentary has now been published which clarifies that when applying the institutional investor carve out any intermediate holding entities should be ‘looked through� regardless of the number of entities and whether those entities are companies or transparent entities. The guidance also provides a number of examples for tracing through to institutional investors.

Further, the guidance states that if the non-close condition is not met on the date of joining the REIT regime, then it would be helpful for the notice to elect into the regime to state the intended plans and timing to meet the condition.

An overseas entity may be considered an institutional investor if it is broadly equivalent to a UK REIT. Prior to April 2022, it was necessary to consider whether the overseas REIT regime was equivalent to the UK REIT regime. This position was relaxed by Finance Act 2022. An overseas entity can now qualify as an overseas equivalent of a UK REIT if it is equivalent to a UK REIT itself, regardless of whether or not the overseas REIT regime is equivalent to the UK's REIT regime.

HMRC’s updated guidance confirms that the question of whether an entity is an overseas equivalent of a UK REIT only needs to be considered with reference to the characteristics set out in the OECD Commentary to Article 10 of the Model Tax Convention, with no further requirement to consider the detailed UK REIT regime rules. Whether an entity has these characteristics or not is a question of fact which should be assessed on a case-by-case basis and HMRC clearances will not be provided on this matter.

Finance Act 2022 introduced an exemption from the listing condition where institutional investors hold at least 70 percent of the REIT’s share capital. HMRC’s updated guidance notes that it would be helpful for further details to be provided to support this position when a prospective REIT gives notice to enter the regime.

HMRC’s updated guidance confirms that a claim for first year allowances in respect of capital expenditure (e.g. the super-deduction or full expensing) and the Annual Investment Allowance (AIA) is permissible, but not mandatory. This is different to the position for writing down allowances, which must be claimed in full where available.

The level of a claim for capital allowances influences the level of Property Income Distribution that must be paid by the REIT in order to satisfy the 90 percent distribution requirement.

Profits on the sale of 'developed property' are not tax exempt if the property is sold within three years of the completion of the development and the development costs exceed 30 percent of the highest of the fair value on entry into the REIT regime, on acquisition, or at the beginning of the accounting period in which the development commenced. Updated guidance states that ‘commencement of development� is an objective test, it is not a defined term and will be the date the physical works commence, which includes the preparation of land as a site for construction.

For further information please contact:

• Saloni Hukku-Sawhney
• Ollie Kurlak