Coming Onshore – are Investors better off when Offshore Property Funds Convert to REIT status?


#1

Shortly before Christmas last year, the financial press reported that the Guernsey investment company F&C UK Real Estate Investments – F&C for
[See the full post at: Coming Onshore – are Investors better off when Offshore Property Funds Convert to REIT status?]


#2

Note that only distributions from a REIT that are made as a PID (property income distribution) can be paid gross, or upon which a reclaim of the witholding tax can be made. Distribution may still be made as an ordinary dividend - either in full or in part - and the tax treatment of these will be the same as for the dividends from other types of company.


#3

Thank you for the comment Ark (Welder), you are quite right REIT distributions are streamlined between the part coming from the exempt property rental business (the PID) and the part from the remainder which is treated as a normal company dividend.

Withholding tax is in fact the general rule for PIDs, though as the article points out, there are various exceptions.

Dividends - actually there are no withholding taxes, you just get a tax credit which is like the position where a withholding applies, except that the company doesn’t have to actually pay any money to HMRC these days.

One further point of interest, arising from what you mentioned about dividends:

“Distribution may still be made as an ordinary dividend – either in full or in part –”

quite true but it can only do so to the extent that the profits have come out of the taxable part of the business. Most of a REIT’s distributions will be made up of the PID element because most of the REIT’s profits (at least 75%) must come from its property rental business (the exempt part). It will be extremely rare, if not impossible that the whole of the distribution will be a normal dividend.


#4

Ok I think I get it now, or at least I understand what a Reit is. But are there still investment trusts that invest in property that are neither offshore or a Reit @satwaki-chanda?

I ask because I want to invest in a property fund and I’ve been advised its best to go down the investment trust route because unit trusts are not the best fund structure for property.

I understand the tax consequences and benefits thanks to your chart but I want to make sure I’m not missing something else.


#5

@SandraDore

Thank you for your question. The answer is Yes, there are standard investment trusts that invest in property, both UK - I can think of two (NB not a recommendation);

  1. TR Property - this invests mainly in other property companies, though it does have a few directly held properties;

  2. Value & Income - not a pure property play - the portfolio consists of a stocks and shares part and a separate property part - unlike TR Property, the company holds the properties “directly” - that is, they are investing in bricks and mortar rather than other companies holding the bricks and mortar.

From a tax point of view both are not tax efficient. TR Property suffers tax leakage because the companies it holds pay tax (unless some of these are REITs). Value & Income also suffers capital gains tax on the properties because I believe they are held through a subsidiary.

But that doesn’t mean they’re bad investments. Some of the offshore companies were better in terms of tax a few years ago, but that didn’t stop them from getting into trouble when they overborrowed and the credit crunch hit.

As for unit trusts - there is an open ended equivalent for the REIT which has the same tax breaks. But of course, the problem is that its open ended and when things get tough the Manager has to redeem the units out of assets that are illiquid and whose value may have decreased substantially.


#6

That’s a handy guide @satwaki-chanda, would have come in handy when I was sitting my CII exams.

One thing I wondered is how are European domiciled funds taxed? I mean Continental European rather than Offshore. I was looking at German property closed ended fund. Would it just be taxed as a company on the Frankfurt exchange?

The problem with the REIT sector though is it’s all looking a bit expensive, for the more mainstream trusts at least.

Probably still a good option for someone needing the income though, just don’t expect too much capital uplift from here.


#7

Don’t know Value and Income but TR European is one of the funds I’m considering.

Thanks for your response @satwaki-chanda.


#8

@satwaki-chanda, thanks for the reply. Regarding my ‘either in full or in part’ comment, I didn’t want to make a statement that could be read as being absolute in its interpretation - i.e. trying to cover my own backside! This is due to my holding in Hansteen which does have REIT status, although it might be thought of as being not quite the same as the offshore investment companies which are converting to REIT status.

Whilst the interim distribution has tended to be 50:50 between a PID and a dividend, then 2nd interim (in lieu of a final) has been weighted more towards being a dividend than a PID: of the 2.9p distribution last year, only 0.4p was a PID. Whether this is down to the level of trading being done, or the fact that a fair chunk of the properties are abroad, I couldn’t say. Anyway, excuses over…!

 

Regarding Value & Income Trust, the properties and associated debt were held via a subsidiary, but both assets and liabilities have now been transferred to VIT.

 


#9

@Jonno
How are European/German property funds taxed?
I can only tell you how they are taxed if they invest in UK property. They are taxed in exactly the same way as the offshore Channel Island funds (assuming a property rental business):
UK income tax at 20% basic rate;
No capital gains on selling the properties – the recent announcements that the UK may tax overseas investors on residential property are unlikely to apply to fund vehicles.
This is subject to any overriding Double Tax Treaty in force – I don’t believe there’s any special clause for Germany, but who knows – it would depend on the type of fund. Some tax treaties allow an exemption for overseas pension funds.
Yes, at the moment, there isn’t much that’s cheap out there. Along with infrastructure funds, these creatures are trading at premiums, though companies like Primary Healthcare Properties have yields in the 6% region and give a nice income since they’re Government backed.
One thing that I would like to have seen regarding REITs is the way their information is displayed in the press, such as the FT and trustnet and the like. They’re treated as normal companies so we see a p/e ratio and dividend yield, but we don’t see what the discount or premium is. Even the British Property Federation’s list isn’t that great – when I last looked, they were actually missing the two Guernsey REITs that had converted.


#10

@ Ark Welder
There’s no need to be like a lawyer and cover your backside here – one’s bad enough on the forum (me, if you hadn’t guessed already!)
Interesting what you say about Hansteen Holdings. Of course, the test is that at least 75% of the profits must come from the rental business, but there are various complicated rules which tell you how you go about calculating the profits e.g. the way the property part is calculated may not be the same as the taxable part – and then the matter can be complicated by group holdings. It may be the case that while it’s all okay at the corporate level, this isn’t necessarily reflected in the way the distribution is split.
Thank you for the information about VIT – I believe the subsidiary was Audax Properties, or something like that? But it’s interesting what you say about them transferring up to the main investment trust because I’d wondered about how they’d shelter any CGT liability on the properties. You normally have an exemption when transferring to a group company but this doesn’t apply when one of those companies happen to be an investment trust.
Of course it now makes sense – until recently, investment trusts were only allowed a limited amount of direct property holdings – the position changed after 2012, now they can invest more in land directly, with the benefit of the CGT exemption. Still have to pay corporation tax on the rents but at about 20% this is a lot more attractive than the 30% it used to be several years ago. But of course, not as attractive as the zero rate for REITs.


#11

I apologise for the really horrible way in which my last two posts have come out. What I’ve done wrong I do not know. The last post was to:

@arkwelder

There’s no need to be like a lawyer and cover your backside here – one’s bad enough on the forum (me, if you hadn’t guessed already!)
Interesting what you say about Hansteen Holdings. Of course, the test is that at least 75% of the profits must come from the rental business, but there are various complicated rules which tell you how you go about calculating the profits e.g. the way the property part is calculated may not be the same as the taxable part – and then the matter can be complicated by group holdings. It may be the case that while it’s all okay at the corporate level, this isn’t necessarily reflected in the way the distribution is split.

Thank you for the information about VIT – I believe the subsidiary was Audax Properties, or something like that? But it’s interesting what you say about them transferring up to the main investment trust because I’d wondered about how they’d shelter any CGT liability on the properties. You normally have an exemption when transferring to a group company but this doesn’t apply when one of those companies happen to be an investment trust.
Of course it now makes sense – until recently, investment trusts were only allowed a limited amount of direct property holdings – the position changed after 2012, now they can invest more in land directly, with the benefit of the CGT exemption. Still have to pay corporation tax on the rents but at 20% this is a lot more attractive than the 30% it used to be several years ago. But of course, not as attractive as the zero rate for REITs.

 


#12

@satwaki-chanda, if you contact @dice2dice then he’ll be able to get something sorted with the posts containing ‘class=”Body”’ etc. - either email or via the Contact Us form on the homepage.

 

The VIT subsidiary was, indeed, Audax Properties and the transfers were completed last March.

Whilst not a REIT, an onshore IT that has taken advantage of the same changes to tax legislation, and which might be of interest, is HgCapital Trust (HGT). This private equity IT (or should that now be investment company?) now pays its distributions as interest rather than as dividends, so a similar situation with regards to taxation in the hands of the investor.

 


#13

@arkwelder

Yes that’s right what Hg Capital are doing makes sense for a private equity fund, given that a lot of their investments take the form of debt securities rather than equity. The interest is taxable -but you can shelter this by electing to pay distributions as interest - the latter are tax deductible.

This is quite recent, and also welcome for investment trusts, as it puts them on the same footing as unit trusts/OEICs.In fact, for the OEIC equivalent for a REIT, dividends are streamed three ways - property rental/interest/normal dividend. Similar applies to tax elected funds.


#14

@satwaki-chanda @arkwelder The HTML problem arises when you copy-and-paste including copying username’s because it copies the formatting you can’t see too.

To get around it, open Notepad and paste there first because it will strip out any invisible formatting, then copy and past from Notepad in to the post.

It might sound complicated but Notepad is such a light and fast piece of software that it’s no bother.

 


#15

Dice thanks very much for this. I was copying and pasting from WORD - not the best bit of machinery there ever was!

 


#16

This is really helpful @satwaki-chanda especially the clear definition of what a Reit is and the difference from non Reit’s and the tax tables. I wasn’t clear on how tax would affect Reit’s if held in my SIPP.

All we need now is some info or reviews/features on good Reit’s to invest in. Besides my house I have nothing in property but I think I probably should.

A former work colleague has invested in Japan housing and I’m sure he said it was via a Reit. Not sure if it was a Japanese listed one but he has done very well out of this.

Unfortuantley we were in the pub talking about this and for some reason or other I’ve forgotten all the details. If anyone else knows about a Japan property/housing Reit please remind me.

 

 


#17

@Harjinder, it could be Japan Residential Investment Co. Not a REIT but a Guernsey incorporated investment company.

I can’t tell you anything about it myself apart from where to get more information on it: http://www.theaic.co.uk/companydata/C09UJ

Don’t try reading about it down the pub though… :wink:


#18

I have a holding in JRIC or Japan Residential @harjinder and @arkwelder. I bought it off an article on here (link below). It hasn’t been an amazing performer so far, though it does pay a high dividend of over 7% (based upon my purchase price).

Also, if you read the article there is a shortage of new build flats in Japan so if you think the Japanese economy will improve this trust should do well.

It’s Guernsey listed so you can see how HMRC will affect you in the tables above.

The article is quite old but its message still holds in my view.


#19

@Harjinder

Thank you for your kind comments. There is in fact, a list of UK REITs at the British Property Federation’s site at http://www.bpf.org.uk/en/reita/ though how complete the list is I don’t know. It was only two weeks ago that they knew about the two Guernsey REITs coming onshore, all because a little bird happened to tweet the information to them! But one of the articles I linked to hinted that there were more conversions - if so, these weren’t on the BPF list.

The Guernsey company investing in Japanese property - one shouldn’t rely on the tax table in my article because that table assumes an investment in UK property, so UK tax is payable at the fund level. But the Guernsey company investing in Japan only, it will be Japanese taxes to consider.

@alexwind @arkwelder


#20

Yes Japan Residential is the fund I was referring to. I think it’s looking good value. Thanks for the advice @arkwelder and I will try my best not to buy investment trusts from a bloke down the pub however tempting. :slight_smile:

I do like the look of property in japan @AlexWind

Do you have any updated info on this @dicem?