If you want exposure to property, the easiest way to do that is to buy shares in a REIT.
A REIT is a property company that owns and operates real estate. This can be anything from big warehouses to offices, flats or shopping malls.
Fancy getting paid to be the Tesco landlord? Read on!
This monster guide shows everything you need to know about REITs. Here is what it covers:
Some popular portfolios suggest a 10% REIT allocation. For example, Rick Ferri’s Core Four, and Tim Hale’s (Smarter Investing).
Let’s understand why.
What are UK REITs?
UK REITs are property investment companies. They generate profits from owning and operating real estate.
That’s where the name Real Estate Investment Trust comes from.
Investors can buy shares in a REIT. This means they own a fraction of the properties and receive rental income.
Investors can also benefit from the share price increase if the REIT properties go up in value.
To provide some background, UK REITs arrived in 2007. They do make property investing much simpler for the end investor. It’s for this reason REITs enjoy a special tax status.
As long as they can meet certain criteria, UK REITs pay ZERO tax on rental income. They also don’t pay any tax when selling property.
But they must pay out at least 90% of property income profits to the shareholders. This is what makes REITs such a good income source.
If you own shares in a REIT you pay tax based on your tax band. But don’t worry, you don’t pay tax if you hold UK REITs in an ISA or a SIPP (pension). More on tax later.
To sum up, a UK REIT is a great vehicle to own UK property.
But let’s talk money. How much can you expect to make from UK REITs?
Are UK REITs a good investment?
Two things affect how much we can make from owning UK REITs. These are:
- Rental income
- Property values
Sure there are lots of other variables. The economy, inflation, interest rates, REIT sectors etc.
But ultimately, it comes down to owning the properties and letting them out for a profit.
As if you own them yourself.
How have REITs performed?
There are dozens of different REITs out there. Let’s focus on the average REIT return first to get an idea. Later in the post, we will see how to pick the best UK REITs.
Luckily, there is an index for tracking UK real estate. That’s the FTSE EPRA Nareit UK Index. It includes UK REITs and real estate companies on the London stock exchange.
During 2017-2021, the UK REIT index has returned a total of 40%, or 6.9% if you measure it per year compounded.
During 2012 – 2017 returns were even better, 100% in 5 years.
Here are the UK REIT returns (top line) for the last 10 years:
And here are the numbers on a graph, plotted against the FTSE UK stock market.
The FTSE NAREIT UK returns came with more volatility, 16.5% vs 13.7% of FTSE UK.
Where’s the income though? If you look at the iShares UK Property ETF, you’ll only find a mere 2.08% yield.
This is because as share prices of REITs increase, the dividend yield falls in percentage terms. The opposite happens if REIT shares fall in price. Overall, the iShares UK property index has returned about 9% per year in the past 10 years.
We will see how to find higher dividend yields later.
Now you might also argue the laggard FTSE UK is not a representative sample of “stocks”. Likewise, REIT is a relatively new concept that started in the US and only spread after the 90s. It only came to the UK in 2007!
What if we take a longer period and go global?
REITs vs Stocks
Here is how US REITs compare to US stocks.
It’s really a tough comparison because you can make a case depending on which period you look at.
Since 1994, US REITs returned 9.63% per year compared to 10.34% of the S&P 500.
At a glance, stocks are a winner not only because of higher returns but also a smoother journey. The standard deviation for stocks was 15.25% vs 19.18% for REITs.
But that’s not the whole story.
If we take a different period, the results are different. Starting from 1972, REITs have actually outperformed stocks.
|S&P 500 (annual return)
|FTSE NAREIT All Equity REITs
Not bad for hands-off real estate!
But high returns don’t mean that you cannot lose money in UK REITs. In fact, one of my worries with REIT investing is that REITs behave more or less like stocks in times of stress.
During the Covid crash of March 2020, UK REITs went 30% down on average.
Meanwhile, some retail and leisure REITs, like NewRiver, lost a lot more value and haven’t recovered yet! Others, like Tritax Big Box, did much better, outperforming many of its peers.
So it definitely depends on which REIT you go for.
But owning some REITs may be a good addition to your portfolio. The goal is not just to “make more money” but to do so while reducing risk.
As we will see shortly, REITs can help you to improve your “risk-adjusted returns”. That’s what diversification is all about.
Are REITs a good hedge against Inflation?
In theory, property is a “hard asset” and should do well in times of inflation. And it did.
In fact, REITs proved to offer good protection against inflation.
The last time we had high inflation was in the 70s. Prices went out of hand. Because of that, the governments had to raise interest rates to control inflation.
Here are different asset returns from the 70s (US-based):
As we see above, REITs did well during the inflation of the 70s.
During 1972-1979, the FTSE NAREIT All Equity REITs Index returned an average of 10.64% per year. This beat the 8% inflation and did better than bonds and the average stock.
Most recently, inflation spiked higher in 2021 after the government boosted the sluggish covid economy. In 2021, US REITs returned 28.9%, and UK REITs 41.30%.
REITs also performed well during the 40s when we had high inflation too, albeit not as much.
This makes sense because property owners can pass on the inflation cost to tenants. They raise the lease prices.
Also, in a booming economy, there’s a higher demand for space. REITs benefit from that too (which leads to higher inflation).
Building a portfolio to hedge against inflation is not the main focus of this post. But in inflationary environments, real estate and commodities tend to do well.
If history is any guide, real estate will continue to perform in times of inflation. Higher interest rates will make their debt more expensive. But on the other hand, inflation will “kill” the debt at the same time.
Should I add REITs to my portfolio?
You can add REITs to your portfolio to provide income and reduce risk.
It’s not that stock and bonds are not enough for a balanced portfolio.
It is, however, about adding an extra element of diversification as part of your risk-on portfolio. The benefits are marginal as we will see below.
REITs are worth considering if you are thinking of investing in property.
I know that some people think of real estate as a more tangible thing than stocks. They also like the dividend income.
REITs can offer property exposure, inflation protection and income.
They are known as equity market diversifiers.
This is the case for other ’tilts’ like value and small-cap stocks.
History suggests having a 10% REIT allocation can improve returns while reducing risk. That’s in line with Tim Hale’s recommendation in the Smarter Investing book.
Here is what happens if you add 10% REITs to a stock portfolio.
As you can see, adding 10% REITs to a Stocks portfolio helped improve returns (10.41% per year) while reducing risk. In other words, the standard deviation with a REITs tilt is the lowest of all 3 portfolios.
Moreover, that’s in line with Morningstar’s research on REITs.
Morningstar suggests the best REIT allocation is somewhere between 4-13% of your portfolio.
Now if you want to add REITs, which asset do REITs replace? After all, the allocation has to come from somewhere.
Given the risky profile of REITs, they have to be part of your aggressive portfolio.
That is to say, REITs should take a chunk of your stocks allocation, crypto or buy-to-let property, not your bonds and cash.
This is because you should expect stock-like declines if you own REITs! It is a bumpy ride.
High returns without volatility would be the dream of every investor. Unfortunately, you can’t have one without the other.
To sum up, the role of REITs in a portfolio is to:
- Invest in property
- Increase your income
- Reduce risk coming from stocks
- Protect from inflation
- Get better tax treatment than Buy-to-Let
To quote Rick Ferri:
Commercial real estate is about 13% of GDP but only represents about 3% of the stock market. Investing an extra 10% in property REITs increased the allocation in commercial real estate closer to its weight in the real economy. Some people say the correlation between REITs and the rest of the market is too high to consider it a separate asset class. That’s a matter of opinion. I fall on the side that says real estate is a separate asset class from common stocks and at times the correlation with stocks are quite low and even negativeRick Ferri on Bogleheads
So these are the reasons why you should add REITs to your portfolio.
Personally, I like UK REITs for the high yield they offer.
It's a nice feeling to see the dividends land on your broker account.
An even nicer feeling is when you buy REITs at a discount. We will see how to do that later.
Having said that, I have concluded that skipping REITs is not a deal-breaker and won’t make a big difference if history is any guide.
How to invest in UK REITs?
The simplest way to invest in UK REITs is to buy their shares using your online broker account.
You can buy UK REITs using one of the following online brokers:
- Hargreaves Lansdown
- Halifax Sharedealing
- Interactive Investor
- Interactive Brokers
You can first check with your existing ISA or SIPP provider if you have one. Most likely, they will support owning REITs.
I am surprised FreeTrade has not added support for REITs in an ISA yet. This is coming in 2022.
Are REITs better than rental property?
Should you invest in buy to let property over a REIT?
Why invest in rental property if REITs exist? Is buy-to-let a better investment than a REIT?
It depends on what type of investor you are.
When REITs are better than Buy-to-let
REITs provide diversification because they hold many property units across different locations.
Commercial REITs, which are more common than residential, offer a reliable income stream. This is because companies sign long leases of at least 5 years and typically longer.
Those rents end up in investors’ pockets as dividends.
Then armchair investors like myself can buy and sell anytime at a click of a button. Moreover, if you find a better opportunity or want quick access to your cash, you can do that with REITs.
REITs provide flexibility, liquidity, and diversification. In contrast, all these are missing from the traditional rental property route.
REITs are better than buy to let property if you want to be completely hands-off and want access to your money at all times.
REITs are also better than rental property if you want to start with a smaller capital.
For example, the average UK property costs £281,000. New property investors may not have a £75,000 deposit handy to get a BTL mortgage. Or maybe they do but are not willing to commit that much in a single location.
Last but not least, UK REITs offer massive tax advantages if you own them in an ISA or a SIPP!
That’s because the UK REIT does not pay company tax on rental income or capital appreciation. You don’t pay any tax in an ISA or SIPP either!
As a result, UK REITs are much better than Buy-to-let from a tax point of view.
Rental property advantages over a REIT
When is buy-to-let better than owning REITs?
If you are an experienced buy to let investor you might want to consider buying property instead of a REIT.
The first reason is that you can add value.
For example, you can purchase a buy-to-let property to fix it up or expand it.
Second, converting a property into multi-occupancy (HMO) is another way to add value. Adding more tenants can lead to higher rents.
Third, doing repairs yourself can cut costs and improve your profits. Instead of outsourcing to a letting agency you can self-manage your tenants.
You can’t do that stuff in a REIT, because you are not the manager, only the owner! Plus you have to accept their fees. Your voting power is very limited.
With you being your own boss comes great power. You can negotiate harder, find bargains and outsource tasks only if needed.
Here is a short summary:
|Access to your money anytime
|Buying/Selling costs and is time-consuming
|You can add value
|Hard to shelter from tax
Overall, REITs can offer certain sector characteristics that you can’t find elsewhere.
On the other hand, if you want full control in your hands, you can’t beat good ol’ buy-to-let.
Fancy owning warehouse units or becoming Sainsbury’s landlord? Or how about owning healthcare properties let to the government?
You can do that in a REIT. For instance, Tritax Big Box, Supermarket REIT, Primary Healthcare Properties respectively.
In the next part, we will see how to buy the best REITs.
Best UK REITs to invest in
How do you find the best UK REITs to invest in?
People like UK REITs because of the high income they pay out to shareholders. Here is a list of high-income UK REITs:
- Real Estate Investors plc – 9.87%
- NewRiver REIT plc – 8%
- Regional REIT Limited – 7.5%
- AEW UK REIT – 6.9%
- Alternative Income REIT – 6.8%
- Civitas Social Housing Plc – 6.31%
- Target Healthcare REIT – 6.26%
And here’s a list of the BIGGEST UK REITs sorted by size (market cap):
- Segro Plc (~15.5bn)
- Land Securities Group plc (~5.7bn)
- British Land Company Plc (~4.8bn)
- Tritax Big Box REIT Plc (~4.5bn)
- Unite Group Plc (~4.2bn)
Now obviously, getting paid high dividends from UK REITs is important. But income is only half the picture.
High income does not mean this is the best REIT!
After all, why would anyone invest in Segro REIT (2% dividend) in a world where an 8% REIT exists?
Investors are rational. Like you and me, they don’t like leaving money on the table.
High dividends are not the only thing to look at. What are some key metrics to know if a REIT is a good investment?
How to tell if a UK REIT is a Good Investment
In this section, I will explain how investors can analyse if a UK REIT is a good investment.
These are the most important metrics when looking at a REIT:
- Dividend yield
- Price to Book
- REIT Sector
- Company Management
- Loan to Value
1. Dividend yield
Income is probably the main reason people invest in a REIT.
In a low-interest-rate world, REITs can offer attractive dividends.
Remember, UK REITs must distribute at least 90% of their rental profits. This means investors can earn high dividends assuming that tenants pay their rent.
The easiest way to find out about the REIT dividend is to look it up on Hargreaves Lansdown or Dividend Max.
Here is an example of the Ediston REIT, offering a dividend yield of 5.57% per year.
The dividend yield is a percentage. It works like the common stocks.
As the share price increases, the yield will fall, all else being equal. Similarly, when the share price drops, the yield goes up.
Bigger REITs that focus on growth pay low dividends. But compensate when the share price increases.
High dividend REITs though have little room for growth but you know what you’re getting at any time.
Dividends are nice, but how volatile are they?
Looking at dividends from previous years definitely helps.
Again, on HL, scroll down to the “Annual Dividend History” table.
This way you can get a taste of previous dividends and their dividend cover.
The Recent Dividends tab will show you how often REITs pay dividends.
Dividends are not guaranteed and can vary over time.
During the covid crash, many retailers closed shop. This meant that REITs focusing on high street saw their dividends cut or delayed.
A very high dividend (think 8%+) might be a sign of trouble. That’s because it usually comes with a big drop in the share price, often for a reason!
2. Price to Book
This is the most important metric to tell if the REIT price is good ‘value for money’.
Price to book is a ratio that shows how cheap or expensive the REIT is compared to its “book” value.
In fact, it’s a great way to measure if you are getting a good bargain.
The Price is the share price at any moment in time.
The Book value sometimes called “Net Asset Value” is the value of all its properties combined.
It’s assets minus liabilities. In practice, it’s what the REIT is worth if it sold all its properties in the market and paid back the mortgages too.
REITs are expected to track their Net Asset Value over time.
Here is a graph of the Standard Life REIT. The blue is the share price and the pink shows the Net Asset Value per share.
As you can see, the share price (blue) tracked the property values for a long time. In fact, it was even trading at a premium for some time.
Then COVID happened! Investors overreacted and dropped the price by A LOT. As a result, the share price was half the Net Asset Value per share!
A 50% discount to NAV. You can actually see the NAV Premium/Discount on the HL website at any time.
You can also calculate the Price-to-book value yourself. Divide the Share Price by the Estimated NAV (NAV per share).
Price to book = Share price / NAV per share
In this scenario, Price to book = 80.10p / 100.40p, so about 0.8 which is roughly a 20% discount to NAV!
What do we learn from all these?
We learn that for various reasons investors are willing to pay a different price.
A well-respected REIT will trade at or above its net asset value. This doesn’t mean if it ever drops below that we should not consider it.
But a REIT that always trades at a discount tells you that something is off. It might continue to do so for a long long time!
This brings us to the next point: Type of REIT.
3. REIT Sector
REITs often specialise in certain market areas.
UK REITs operate in the following sectors:
- Industrial units
- Student accommodation
REITs develop an area of expertise and have a certain strategy.
The REIT type can reflect how reliable the income is and what investors are willing to pay for it.
Universities and state departments sign long leases. They are also more reliable than say retail shops and restaurants.
In the online shopping boom of COVID, logistics and industrial REITs outperformed.
Likewise, city centre flats, offices and high street dropped.
Investor sentiment can, of course, change over time. It’s what makes REIT investing so interesting.
The share price always reflects that. We saw before how the share price can drastically diverge from NAV!
As a result, this can lead to opportunities.
Some REITs operate in more than one sector. You can find the REIT sector breakdown on their website or on their annual and interim reports.
For example, here’s the latest sector breakdown of the BMO BREI REIT. I copied it from their half-year 2021 report.
As you can see a REIT can operate in more than one sector.
4. Company and Management
When valuing REITs, you should take the company history and management into account.
Good management will both communicate well and execute the strategy well. In times of stress, they will change direction and skate where the puck is going.
If you want to dive deeper into certain REITs follow their RNS updates for some time.
Are they promising the world? Mistakes happen. Do they own their mistakes?
Do the management always want to please investors but fail to execute?
Does the management have ‘skin in the game’?
For example, you often see RNS updates for management that purchased shares in the REIT. This is mandatory thanks to regulations.
It can be a good sign to see the management backing up the company with their own money.
This applies to all companies, not only REITs. It’s the “owner-operator” model!
Other questions to judge a REIT are the following:
- Has the share price traded mostly at a premium or a discount to NAV?
- Is the dividend amount rising every year?
- Are there sudden drops to the share price or is it a smooth ride?
Read the annual or interim reports from the REITs website. LSE can be quite dry sometimes!
REITs charge fees for running the fund and managing the properties. REIT fees typically are in the range of 1-2% per year.
Management costs are different from one REIT to another. You have costs like salaries, bonuses, office costs, and property management.
REITs have no fixed operating costs. Although you can get a feeling from the Total Expense Ratio (TER%) you can dig further into the annual reports.
6. Loan to Value
The max loan to value a REIT can have is 50%.
The higher the loan to value the higher the risk. This is because a bigger LTV means that if property values drop, the REIT will need to sell assets to pay back the bank!
If this is done in a forced sale, an over-extended REIT can spiral out of control.
Also, higher debt makes the REIT more sensitive to interest rate rises.
As interest rates rise, an overleveraged REIT gets in trouble. It becomes worse if the sector is declining, like high street shops.
Again, bankers want to see a maximum LTV threshold. If the REIT breaks the covenant they will demand payment!
REITs can fail if they cannot secure financing. Intu is the most popular example where investors lost their money. They used to own UK shopping centres and failed in 2020.
I’d say REITs with LTV > 40% are riskier. But it also depends on the sector they operate in. A high LTV in social care homes funded by the government is not the same as a shopping mall REIT on the same LTV.
These are the most important metrics.
Depending on the REIT you can look at other metrics such as these.
- Vacancy rates
- Rent collection
- Footfall (in case of retail shops)
- Weighted average unexpired lease term
Michael’s View on REITs
The point is not to choose specific names I have chosen. After all, by the time you’re reading this article my REIT selection might have changed.
Always do your own research. Investing in these names does not guarantee any gains and I am not liable for any losses. I could be completely wrong in my analysis. With the disclaimers out of the way, let’s go.
It makes sense for me to generate some income from REITs. This is as part of my Limited company investments.
In 2021, I started allocating some money to undervalued UK REITs as I had mentioned before.
That’s still in line with my property investing strategy. In terms of allocation, property is still 15% of my total asset allocation. I didn’t want to add more to Property Partner until the path becomes clear after the US acquisition.
I particularly liked the cheap prices UK REITs traded at. And still are. These are smaller REITs with above-average dividends.
On the REIT front, I opened positions in Standard life Property Investment Trust REIT (SLI), BMO BREI and Hammerson (HMSO). SLI and BREI have performed better than I expected since I bought them. They’re still playing catch up with an increasing NAV.
Should the price reaches NAV or the situation changes, I will reassess.
HMSO is a purely speculative play, It owns many retail shops such as the Bicester village. Management history is terrible, plus it was down -80% after COVID. It’s a risky situation, in debt and selling assets.
That said, ‘Everything has a price‘ they say. New CEO and the strategy is changing.
Two more REITs I’m watching are the Schroder REIT (SREI) and Ediston Property Investment Co Plc. SREI’s top 3 tenants are two universities and the secretary of state 🙂
The latter (EPIC) is a retail park owner. It has a relatively stable NAV and paid dividends throughout the pandemic.
With the exception of Hammerson, all the above REITs are all small ones (£150-300m),
This has the added benefit of being a good acquisition target. This recently happened with Mckay Securities, shooting the REIT up by 30%.
What are some good REIT Resources?
REITs take time to study.
But I like to read about them and the market in general. Are the offices back? Why are Grade A offices suddenly in high demand? How will rising interest rates impact commercial real estate?
What’s going on with retail footfall vs 2019? Are rent collections improving as COVID becomes endemic?
Here’s what I occasionally read to stay up to date with REITs and trends:
- REIT announcements (RNS)
- REIT annual and interim reports
- Knight Frank research library and Savills
- Market updates on Twitter
I particularly like @dopamine_uptake. He provides very useful research and updates.
If standalone REIT research is too much for you, you can always look at a diversified REIT ETF.
Here is a list of various REIT ETFs together with the index and fees:
|iShares Developed Markets Property Yield UCITS ETF (IE00B1FZS350)
|FTSE EPRA/NAREIT Developed Dividend+ Index
|Global property ETF, tracking companies that pay above 2% dividend yield
|iShares Global Property Securities Equity Index Fund (UK) (GB00B5BFJG71)
|FTSE EPRA/NAREIT Developed Index
|Global Property Fund.
|iShares UK Property UCITS ETF (IUKP) (IE00B1TXLS18)
|FTSE EPRA/NAREIT UK Property Index
|UK-focused ETF with a focus on growth. Direct investment into listed real estate companies and REITs.
|Amundi ETF FTSE EPRA NAREIT Global UCITS ETF DR (LU1437018838)
|FTSE EPRA NAREIT Global
|Popular fund tracking large REITs in developed markets
How do interest rates affect REIT prices?
As inflation is rising, interest rates are on the rise too.
Will higher rates affect the REIT prices and their returns going forward?
Yes, like all risk assets, high-interest rates are a drag on their present value.
This is because interest rates represent the risk-free rate of return available to investors. As a result, interest rates affect the relative value of other assets, including REITs.
For example, if you can suddenly earn 5% in the bank, why take the risk of investing in REITs?
A sudden hike in interest rates would lower the price of risk assets. More people would sell them as they are not as attractive as they used to be.
High-interest rates also make your mortgage more expensive.
REITs may have some fixed debt (and rental income). But eventually, the fixed period ends. As a result, REITs will have to pay more for holding debt.
Higher interest rates would dampen the property value growth too.
As Buffet said, interest rates are like gravity in valuations.
The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates. The higher interest rates are, the less that present value is going to be. Every business, whether it’s Coca-Cola or Gillette or Wells Fargo — its intrinsic valuation is 100% sensitive to interest rates.Buffet 1994
Looks like the current high inflation (5.5% UK as I’m writing this) will change rates. But there’s a massive difference between a “high rate” of up to 2% in 2024 and a 15% rate like the 70s.
Now I’m not sure if rates will go much higher. Noone can predict interest rates, they are impossible to predict.
In 2021 we saw inflation spiking. This caused the Bank of England to start raising interest rates. UK REITs returned 28.9% in 2021, again proving that inflation did not affect their prices by much.
If inflation stays high, rates should go up. But at the same time, high inflation “kills” the debt REITs hold which should benefit REITs.
But then property values must go down or at least stop rising by as much if rates go up. That’s what theory says.
Basically, it’s complicated! This NYU Stern research showed that:
Industrial, Storage, and Healthcare REIT sectors indicate the most interest rate risk, while the Industrial and Lodging sectors display greater equity market risk.
Another paper (Allen, 2000) studied REIT returns. They showed REITs are more sensitive to the stock market environment than they are to interest rate fluctuations.
Individual REIT characteristics influence the riskiness of REITs, like their financial leverage, company strategy and type of assets.
Of course, no one can predict where interest rates go from here. 10 years ago, people said they can only go in one direction: UP. But this didn’t happen.
I like REITs that are not overleveraged and on a healthy balance sheet. They should be able to weather the rate hikes as other risk assets do.
Those with high LTV (40%+) will struggle, particularly if property values decline.
Now I don’t think the Bank of England will raise interest rates high enough to crash the UK property market. Consumers are so in debt to the housing market. Crashing it would mean a recession.
After Brexit and Covid, I don’t think there’s much leeway for hurting the economy. Sadly, even though property prices are not as affordable as they used to be, I don’t see that changing.
How are REITs taxed in the UK?
UK REITs come with great tax advantages.
REITs don’t pay tax on the rental income. They don’t pay tax when selling property either!
But they must pay out at least 90% of property income profits to shareholders.
Do shareholders pay tax on the dividends received or share appreciation? It depends!
Tax on REITs in an ISA or Pension
You don’t pay tax when holding REITs in an ISA or a pension.
Dividends received are tax-free in these wrappers.
But don’t forget that as the REIT grows in value, your shares may increase too. If you sell the REIT shares for a profit, you won’t pay tax in an ISA or a SIPP.
Overall, REITs have an amazing tax advantage over UK buy-to-let property.
How are REITs taxed for Limited Companies
The gain from selling your REIT shares (capital appreciation) is subject to corporation tax (19% – 25%).
What about REIT dividends for limited companies?
Even though REIT dividends are called ‘dividends’ they are misleading.
Limited companies normally don’t pay tax on dividends received. However, REIT dividends are special.
They come in 2 types:
- Property Income Distribution (PID)
- Standard Dividends
Standard dividends are not subject to corporation tax, like other dividends.
But PIDs are subject to tax at the corporation tax rate.
Even though a LTD company is eligible to receive gross PID dividends and pay tax later, some online brokers might withhold 20% of it at source.
Tax withheld is what the REIT pays to HMRC on behalf of the shareholder. But it’s what applies to individual investors, not companies!
But anyway, speak to your online broker and seek a gross payment if possible. Interactive Brokers withhold 20% tax and say they can’t change it.
How are REITs taxed in General Investment Account (GIA)
If you hold REITs outside an ISA then you need to pay tax on it.
PID Dividends are taxed as income, like buy-to-let rental income for example.
You pay tax depending on your tax band. For example, higher rate taxpayers would pay 40% tax on REIT PID dividends.
Standard (non-PID) dividends, on the other hand, are taxed as normal dividends are. So a basic taxpayer pays 7.5% dividend tax. A higher rate pays 32.5%.
But thankfully, HMRC offers a tax-free dividend allowance for the first £2,000 of standard dividends.
The dividend tax will increase by 1.25% from April 2022.
But dividends are one part of the gain. The rest can be capital gain if shares go up in value as properties appreciate.
If you sell REIT shares in a general investment account then you pay capital gains tax on the profit. The first £12,300 of profit are tax-free in every tax year!
Should REITs be in a LTD company or in an ISA?
From the above, we can tell REITs are better owned in an ISA or pension if possible.
ISA always wins because the dividends are received gross and are tax-free. And so are the capital gains if you sell the REIT shares for a profit.
I hope you enjoyed this UK REIT guide.
Happy REIT Investing!