What are REITs?
REITs are Real Estate Investment Trusts. They are companies that have elected to adopt a tax status which is now open to eligible UK companies. SEGRO became a REIT on the earliest possible date – 1 January 2007.
Why are REITs a Good Thing?
REIT status offers exemption from UK corporation tax on profits and gains from an eligible UK portfolio and gives a greater flexibility to undertake asset disposals since tax on capital gains is no longer an issue. Development gains on investment properties are also exempt from corporation tax on capital gains, subject to certain conditions.
REITS are required to distribute to their shareholders at least 90 per cent of the profits from the part of the business that is within the REIT ringfence.
Why REIT Status Works for SEGRO
SEGRO is well suited to REIT status due to its strong focus on a single asset class - Flexible Business Space on a pan-European platform. With a conversion charge of £82 million, REIT status has allowed the Company to release some £416 million of provisions for deferred tax on the eligible UK income. SEGRO expects to save a significant annual sum from this tax exemption alone.
SEGRO’s growth plans are development led and the structure of UK REITs complements and facilitates the execution of SEGRO’s major development programme, because development gains will generally be tax free.
SEGRO’s pan-European focus is a key differentiator as the Group pursues superior returns for its shareholders. The UK REIT structure, combined with the tax rules in most other European jurisdictions, facilitates the creation of a tax efficient international structure.
The benefits for SEGRO include:
- Exemption from UK corporation tax on profits and gains from the UK portfolio
- More flexibility to undertake asset disposals
- Development gains on UK investment property become tax exempt (subject to three year rule)
- Facilitation of a more efficient structuring of overseas activities.
Dividend Under REIT Status
In November 2006 SEGRO announced a new REIT dividend policy with a high income pay-out ratio to take effect on dividends paid in relation to 2007 performance and beyond.
In future the Board ordinarily expects total dividends to exceed the mandatory 90 per cent PID (Property Income Distribution) element, and to comprise between 85 and 95 per cent of the worldwide recurring property rental earnings plus a proportion of trading property profits and other income from non-property activities. This new policy will take effect during 2007 and is not reflected in the proposed final dividend for 2006.
Witholding tax
For UK shareholders who are eligible for exemption from the 22 per cent withholding tax, an HM Revenue & Customs Tax Exemption Declaration is available for download.
Non-UK resident shareholders in countries with double tax treaties with the UK which provide for withholding tax on dividends at rates lower than 22 per cent, may be able to make claims for repayment of the difference from HM Revenue & Customs.