GORDON BROWN will say today that property companies wishing to convert to become Real Estate Investments Trust (Reits) will have to pay a conversion charge based on a percentage of their gross assets, The Times has learnt.

It is expected that the charge will be levied at around 2 per cent. The industry had widely expected the conversion charge to be based on how much capital gains tax they owe.

It is understood that the Treasury has decided to base the charge on gross asset value to ensure that property companies do not wriggle out of the payment by finding ways to artificially reduce their capital gains tax liabilities — for example by buying up capital losses.

Alongside details of the Reit conversion charge, the Treasury will unveil a number of eleventh-hour changes to the structure of Reits, designed to make them attractive to big property companies. The Treasury will ease the gearing limits on Reits, which had dictated that income must exceed interest payments by a factor of 2.5 times.

The Treasury will also give property companies an element of flexibility on rules that no individual shareholder can own any more than 10 per cent of a Reit. A penalty will be applied to companies that break the 10 per cent rule, but it is thought that the Treasury will loosen the definition of a single shareholding.

Reits do not pay capital gains tax or tax on rental income, in return for which they must distribute the majority of their income to shareholders as dividends. It is understood that the Treasury will relax the minimum distribution requirement from the 95 per cent of net profits stipulated in consultation documents.

Sources close to the legislation said: “There will be significant tweaks in the light of responses, which will show the Treasury have been responsive to the comments made.”

The changes will be a boost to lobbyists, including the British Property Federation, which have led a campaign to get Reits introduced to the UK. However, it is unclear whether the changes will be sufficient to woo investors away from off-shore investment vehicles.

It is expected that the improved news on Reits will coincide with a clampdown on tax avoidance in offshore unit trusts.

The Inland Revenue wants to put a squeeze on property dealers who are exploiting a loophole in stamp duty legislation that allows them to escape the 4 per cent land tax levy by injecting buildings into new offshore property unit trusts.

Stamp duty relief on transferring assets into new property unit trusts, known as “seeding relief”, was brought in two years ago to make it easier for institutional investors to repackage their assets into different trusts.

RISING VALUE OF A GLOBAL MARKET

• Since 1990 the value of the global Reit market has increased from $150 billion to more than $640 billion, according to Morley fund management
  
• Japan, Australia, the United States, Singapore, France, Belgium and the Netherlands are among countries that have a Reit-type vehicle
  
• Germany may also introduce a Reit
  
• Lobbyists believe that Reits will help to provide a new investment vehicle for savers who want exposure to commercial and residential property

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