I was in Birmingham this week admiring the all new and shiny shopping complex called the Mailbox.
This complex comprises car parking, retail outlets and office space and you can buy shares in it too. 100p buys you a share in the Single-Use REIT with an expected return of 5p per share.
This is a classic REIT or Real Estate Investment Trust, but instead of being a collective investment, just the one asset is inside. Usually, REITs allow you to invest in property in a collective of other commercial properties rather than putting all your eggs in one basket. Investing in the Mailbox does rather smack of restricting your investment, but if you live in Birmingham, you may see the advantage. It also collects £9.8 million in rent so is very profitable.
REITs are very tax-efficient because the firm is not subject to corporation tax. In return, HMRC demands that they distribute at least 90% of their property income to shareholders every year as Property Income Distribution or PIDs. Also, they must derive at least 75% of their profits from rent.
These are not treated like regular dividends, so don’t qualify for the annual dividend allowance.
How are they taxed?
PIDs are taxed as property rental income just like rent from a buy-to-let property.
When you receive income, the REIT must withhold basic rate income tax of 20%. If the REIT paid £100, you’d receive £80, and HMRC will get £20.
If you’re a basic rate taxpayer, you won’t have to pay any more tax when you fill in your tax return.
The only way to ensure you don’t pay tax on your PIDs is to hold your REITs in a tax wrapper, such as an ISA, JISA or SIPP pension. If you do this, the PID will be paid gross – i.e. without the withholding tax deducted.
I wonder how COVID and the downturn will affect incomes from the Mailbox? Only time will tell. Remember, “don’t let the tax tail wag the investment dog”, Google this if you haven’t heard this wise phrase.