Getting REITs right?

Gordon Brown confirmed that draft legislation will be published in the 2006 Finance Bill on the launch of the proposed "Real Estate Investment Trust" a new tax-free vehicle offering residential property investments. REITs will be collective investments set up as companies, similar to existing investment trusts. Buying shares in a REIT will allow you to invest in property without the hassle of physically buying bricks and mortar.

REITs are already popular in the US, France, Australia and Japan. REITs will allow individual investors to take a punt on residential property in a way that is not currently available. As a knock effect, such investments are part of a larger plan to increase the supply of housing in the UK. Your REIT would, in theory, offer similar returns to those you would get by owning property directly but without the concentration of risk and illiquidity you face by owning an actual house as an investment.

You will be able to dispose of your shares in a REIT far more easily and speedily than you could sell a house.

Details remain to sketched in but it is likely that the REIT regime will be open to UK companies listed on a recognised stock exchange. These companies will not have to pay corporation tax on qualifying property rental income or capital gains tax as long as the pay out at least 95% of net taxable profits on rental income to investors, who will then pay tax on the income at their marginal or highest rate.

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