Real Estate Investment Trusts

Real Estate Investment Trusts
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A real estate investment trust, more commonly referred to simply as a REIT is merely an investment vehicle that offers a more tax efficient way of investing in property. Its primary target is to get rid of the tax problems associated with investment in properties through a form of pooling investment (such as a property company) in comparison to investing directly in property. Real estate investment trusts aim to offer a similar option to potential property investors as mutual funds provide in the stock market and are essentially just an organisation with the only aim of acquiring and managing properties.

REIT’s benefit from a series of key benefits including tax advantages, income return and inflationary protection. REIT’s are a kind of organisation that are generally considered to be a “pass-through” company, meaning that the majority of income cash flows can be issue to the shareholders and investors, free of corporation tax which in turn means higher dividends for said investors, through the income from rentals and management.

Historically, REITs were most common in the United States and various other developed countries but are a relatively new addition to the investment scene within the United Kingdom. The primary features of a United Kingdom are that it is exempt from tax on any income received through rental and also any gains on the sale of these properties. However, it is required to meet certain requirements. For example, it must:

* Be a listed company (a company who’s share’s can be purchased on a stock exchange.
* Not be controlled by five, or less than five, shareholders
* Have invested in properties that consist of a minimum of 75% of it’s total assets
* Have rental profits that are a minimum of 1.25 times the amount of it’s interest payments
* Pay a minimum of 90% of it’s tax exempted profits out as dividends

However, the repercussions of failing to abide by these rules can often vary. In many cases, tax is made payable depending on the actual level of the breach. In some more extreme cases, the organisation may be stripped of its REIT classification altogether. The distribution of the profits resulting from the tax exemption profits on investments, are only provided to investors following the subtraction of the basic national tax rate. Those investors who fall within the higher tax rate band will be required to pay additional tax on these dividends but this would be treated as United Kingdom property income as opposed to dividend income.

For investors or individuals looking to start or invest in REIT’s, it’s important to consult professionals who can properly advise on the full level of implications and considerations required as it’s quite a complicated field. The premise is simple but the actual details require careful consideration as the punishments for failing to abide by the rules can result in some expensive punishments.

Real Estate Investment Trusts are affordable more risk-free ways of investing for private wealth managers with another primary benefit being that shares in the publicly traded REIT’s are a much more flexible trading options and provide a higher level of stability.

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