Investment trusts to boost property sector

Britain's property sector yesterday received a massive boost in the form of new trusts which will offer big tax-breaks to people who invest in real estate companies.

Britain's property sector yesterday received a massive boost in the form of new trusts which will offer big tax-breaks to people who invest in real estate companies.

Based on schemes in the US, Australia and France, property investment funds will be launched in the UK next year in a bid to attract higher levels of investment into building new houses and commercial offices.

In a move which pleased the property industry, Gordon Brown said the trusts would be able to hold both commercial and residential property.

But the Government's main aim is to increase dramatically the amount of investment directed into the private-rented sector. This is in response to problems experienced by especially the low paid in finding affordable accommodation, highlighted in Kate Barker's report on the housing market, published ahead of the Budget.

Mr Brown said the Government would consult the industry until July on the exact form of the trusts, which will be based broadly on America's real estate investment trusts.

The move "responds to concerns that barriers in the tax system may be contributing to distortions in the market for property investment resulting in poor liquidity, barriers for smaller investors entering the market and high levels of debt financing, which increase the sector's sensitivity to interest rate changes", the Treasury said in a statement.

While details of the trusts have yet to be hammered out, it is likely they will offset dividends against profits, with an undertaking to distribute most of their income to shareholders.

The Government hopes that private investors, who currently enjoy tax breaks on equity investments through individual savings accounts, will direct money into the property funds. More significant will be investments by pension funds, which find it difficult to hold assets in private property under current regulations.

The industry responded enthusiastically to the initiative, which analysts think will double the £18bn market capitalisation of the listed property sector within 10 years. Ian Coull, the chief executive of Slough Estates, said: "We warmly welcome this. The issues now to talk to the Government about include how much of the earnings can be retained, and what the cost of entry will be through the capital gains charge."

While the property trusts will offer tax breaks once they are set up, companies that want to take on the investment trust status will have to pay a one-off capital gains charge on increases in the value of their portfolios.

Guy Smith, a partner at the accountants Moore Stephens, said: "Companies will have to have quite a lot of cash as they could face a capital gains bill of as much as 30 per cent as an entry charge."

While the Chancellor was praised for creating a way of boosting investment in houses and offices, he was accused of creating a "stealth tax" on stamp duty on properties. Mr Brown said current levels would be unchanged, but industry experts pointed out that the surge in house prices meant that more and more transactions would move into the higher bands. This is forecast to increase revenues from stamp duty by £1.9bn next year to a total of £9.4bn.

There were also extra provisions for stamp duty on partnerships which hold property. The measures will see partners taxed if they change the level of their holding. Stephen Herring, a tax partner at BDO Stoy Hayward, said: "This could affect partnerships such as law firms where partners are leaving and joining the firm all the time."