Real estate investment trusts (REITs) which will enable small investors to put money in property without paying tax twice are on the way, Gordon Brown announced in his Budget speech. REITs will fill a big gap in the options open to small investors who do not want to risk their whole nest egg in one buy-to-let property, but for whom shares in property companies are highly taxed and subject to the often irrational booms and busts of the stock market.
REITs spread the risk, building up a portfolio of residential and commercial properties that are owned collectively " a bit like unit trusts but with the added security of owning land rather than companies and also gaining economies of scale in their property investments.
The two main differences between REITs and quoted property companies are that they are not taxed, and the income is almost entirely distributed as dividends to shareholders, who pay income tax individually.
REITs have proved immensely popular in the US, where they were introduced in 1960. France, Japan and Australia have similar schemes. At present, UK tax law makes property unit trusts unattractive because the trust pays corporation tax and capital gains tax, and the investor then pays income tax on top. Despite the disadvantages, there are a number of unit trusts based on property in the UK, but they usually concentrate on office blocks and trading estates.
Investors can also buy shares in publicly quoted property companies that own and manage properties to rent; but not only do they pay tax twice but the share value depends on the whims of the stock market rather than the underlying value of the properties they own. Listed property companies are effectively valued at between 30 and 40 per cent below the market value of the properties they own, which makes borrowing more capital difficult and also makes them vulnerable to bids from asset-strippers.
David Melhuish, senior policy officer at the Royal Institution of Chartered Surveyors, believes REITs will be popular when they arrive in a year or so. Unfortunately, there are obstacles to overcome first, mainly to ensure overseas investors still pay taxes.
'It is very positive that the Chancellor intends to legislate, although there are a number of things outstanding,' he says. 'We have a year to close a number of tax loopholes, but not a lot of progress has been made so far. …