Dec 192013
 

One of the welcome changes in the recent Autumn Statement is the classification of a REIT as an institutional investor for the purpose of the “close company” test. This will hopefully make it easier for REITs – both foreign and domestic – to invest in other REITs.

Recall that the purpose of the close company test is to ensure that the fund vehicle has a diversity of ownership. REITs cannot be private, but must be open to all.

The close company test is structured in such a way that the presence of an institutional investor will not in itself cause the condition to fail. For example, if a REIT has a single investor, this would normally fall foul of the rule that there should be more than five investors. However, if our single investor happens to be a pension fund, then although there is only one shareholder, there are many many people behind that pension fund who are the ultimate beneficiaries. In these circumstances, the institutional investor rule makes sense.

From 1 April 2014, REITs will also be included in the list of entities that are recognised as institutional investors. In other words, it will be possible for REITs – both domestic and foreign equivalents – to invest in other REITs, secure in the fact that their presence will not impact on the investee REIT’s close company status.

This rule change makes sense in two ways:

  • First of all, by analogy with our pension fund example, REITs should also be on the list when one considers who the ultimate investors are supposed to be;
  • Secondly, the other institutions on the list includes authorised funds – unit trusts and OEICs, which has as a subgroup, Property Authorised Investment Funds1. This latter vehicle was designed on the REIT model and is in fact the open ended equivalent to the REIT. In these circumstances it makes no sense to include one and not the other on the list.

The inclusion of REITs as institutional investors also complements an earlier measure in this year’s Budget, which permitted REITs to treat income from other REITs as tax free rent. The inclusion of foreign REITs as well as the domestic variety, provides an attractive incentive for overseas investment.

Link to draft legislation.


 

  1. CTA 2010 s 528(4A)(a), (b).
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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  2 Responses to “Autumn Statement 2013 – REITs to be classified as Institutional Investors”

  1. Interesting post. Presumably the changes appeared in last week’s budget?

    • Satwaki Chanda

      Hi Steven, yes, I didn’t actually see it in the announcements, but the Finance Bill will come out next Thursday 27 March 2014. so I expect we’ll see it there.

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