Government may tighten rules if pubcos abuse REIT status

HM Customs & Revenue has warned pub operators against becoming a real estate investment trust (REIT) in order to avoid paying tax.

With several leading pub operators investigating the prospective benefits - and possible disadvantages - of becoming a REIT, and despite Treasury assertions that the new vehicle is "revenue neutral", a spokeswoman for HM Customs said it would take a very dim view of companies looking to make the move to reduce their tax burden.

"There are rules governing how a company may convert into a REIT," she said. "Provided these are met, we don't have a problem. However, if we establish that having become a REIT a company is then using it as a means to avoid paying tax, we will deal with them appropriately."

A company converting to a REIT must distribute at least 90 per cent of its profits as dividends to shareholders but doesn't pay corporation tax. Nor does it pay capital gains tax on property disposals.

Some City observers are suggesting that the government might tighten the rules governing REITs, which were originally aimed at off-shore companies. One said: "REITs weren't designed for groups like these. The government is not going to want to write out a tax-rebate cheque for hundreds of millions of pounds to a pub company. This is something that may well be adjusted in the coming months."

A Treasury spokesman thought it unlikely pub companies could meet the requirement that 75 per cent of REITs rents came from property, but added that the rules governing REITs "will be kept under review". The department would "address potential loopholes as they arise", he added.

Companies have to apply to HM Customs & Revenue for permission to convert to REIT status, although its spokeswoman said such approaches were bound by confidentiality agreements.