REIT Proposal

Schroder Real Estate Investment Trust Limited REIT Proposal Schroder Real Estate Investment Trust Limited (the "Company") has today published a circular (the "Circular") to shareholders setting out proposals to become resident in the United Kingdom for tax purposes, to apply for entry to the REIT Regime, to adopt New Articles and setting out a Notice of Extraordinary General Meeting. 1. Introduction The Company was launched in July 2004 as an Authorised Closed-ended investment scheme. The Company's investment objective is to provide Shareholders with an attractive level of income together with the potential for income and capital growth through investing predominantly in UK commercial property. Both the Company and its property owning subsidiary companies are currently non-UK resident for UK tax purposes and are therefore not subject to UK tax on capital gains. The property owning subsidiary companies are, however, subject to UK income tax at the current rate of 20 per cent. on their taxable UK property income. In calculating the income tax liability of the property owning companies, certain allowances and expenses can be deducted, including interest payments on intra-group loans. For the Company's principal property owning company, SREIT Property Limited ("SREIT PL"), the level of interest which is permitted to be treated as deductible is determined in accordance with an Advanced Thin Capitalisation Agreement (an "ATCA") entered into with HMRC. SREIT PL entered into this agreement following the conclusion of an HMRC enquiry to secure certainty on intra-group interest deductibility for a five year period with the ATCA terms also adopted for all other inter- group loans within the group. That agreement with HMRC expired on 31 March 2015. Based on advice received from the Company's tax advisors and in light of changes in commercial lending practice, it is likely that the amount of UK income tax payable going forward would be higher, which would reduce net income and Shareholder returns. Since 1 January 2007 there has been legislation in place in the United Kingdom to enable qualifying companies (and groups) to apply for Real Estate Investment Trust (REIT) status. A company (or group) carrying on Qualifying Property Rental Business may give notice to become a REIT, subject to meeting a number of initial and on-going conditions. The main tax advantage of the REIT Regime is that the profits (i.e. income and gains) of a REIT's Qualifying Property Rental Business are exempt from UK income tax and corporation tax. In very broad terms, what the regime seeks to achieve is to replicate as far as possible the tax treatment that would apply if the shareholders held UK property directly, by moving the taxation point from the companies holding properties (within the REIT Group) to the shareholders. This is administered by the application of withholding tax on distributions made by the principal company of the REIT Group. Although the principal rationale for the Proposals is to improve Shareholder returns relative to the position as if the Proposals were not adopted, there may also be a longer term benefit from converting to a REIT in terms of improved liquidity as a result of being able to access a wider potential investor base. In order to facilitate the Group qualifying as a REIT, certain changes are required to the Articles. These changes take account of the REIT Regime, specifically the rules regarding the payment of dividends to Excessive Shareholders and the requirement that the Company (as principal member of a REIT Group) be solely UK resident for tax purposes. If approved by Shareholders, the New Articles will only take effect when the Board notifies HMRC of its intention to become a REIT, which it would expect to do during May 2015. The Extraordinary General Meeting will be held at Trafalgar Court, Les Banques, St. Peter Port, Guernsey GY1 3QL at 10.00 a.m. on 28 April 2015. 2. Background to conversion to REIT status A REIT is a company that either itself owns and operates a property rental portfolio, which can be commercial, residential or any other type of commercially let property, or comprises a group of companies which carries out these activities. Under the REIT Regime, at least 90 per cent. of the net rental income arising in the Qualifying Property Rental Business for each accounting period must be distributed to shareholders and in return, provided certain conditions are met, the REIT Group is exempt from UK corporation tax and income tax on income and gains relating to its Qualifying Property Rental Business (i.e. broadly the property rental business of UK resident members of the REIT Group and the property rental business in the UK of non-UK resident members of the REIT Group). REITs are intended to enable the income from rented property assets to be generated in a tax efficient manner and to ensure that the net return for shareholders from investing in property are broadly consistent with returns from direct property investment. A group of companies which elects for REIT status is permitted to carry on both tax-exempt property rental activities and other, taxable activities, subject to certain restrictions which are set out in more detail in Part II of the Circular that is shortly to be submitted to the National Storage Mechanism and available for inspection at The Board believes that the Company and, where relevant, the Group should currently satisfy the relevant conditions to be eligible for REIT status (save for the condition in relation to tax residency which is considered in more detail below in the sub paragraph headed "Board composition and tax residency of the Company") and the Board expects the Group to continue doing so in the future. Prior to 17 July 2012, companies and groups entering the REIT Regime were required to pay a one off charge equal to 2 per cent. of the value of their property assets. This conversion charge has been removed and if the Company were now to convert to a REIT, the conversion charge would not apply. 3. Benefits of conversion to a REIT The income tax charge borne by the Group for the period ended 31 March 2014 was £153,000. For the year ended 31 March 2015, it is estimated that the income tax charge borne by the Group will increase to £198,000. As noted above, the income tax payable by the Group to date has been computed with reference to the ATCA agreed between SREIT PL and HMRC which determines the maximum amount of interest which is deductible on intra-group loans for SREIT PL. The ATCA expired on 31 March 2015 and the Board has sought advice from its tax advisors as to the likelihood of agreeing a new ATCA on the same or similar terms. The level of deductible interest permitted by HMRC under an ATCA is assessed with reference to current commercial lending practice and, based on current practice, the Company's tax advisors estimate that UK income tax payable is likely to increase to between £1,450,000 and £1,700,000 per annum. By converting to a REIT, the Group will no longer be subject to UK income tax on the rental income from its Qualifying Property Rental Business, provided that it meets certain conditions. This should effectively reduce the overall burden of UK taxation for most Shareholders in respect of the Qualifying Property Rental Business. The removal of this tax burden in relation to the Group's Qualifying Property Rental Business should increase net income and the overall profitability of the Group. As noted above, an ancillary benefit of the globally recognised "REIT brand" is the ability to access a wider investor base, which may for example improve liquidity and demand for the Company's Ordinary Shares. 4. Other implications of conversion to a REIT General It is not currently proposed that any changes will be made to the Company's investment objective and policy as a consequence of conversion to a REIT. Electing for REIT status will not change the legal status of the Company, its country of incorporation or its share capital. The Company would continue to be an Authorised Closed- ended investment scheme in Guernsey (as long as it remains incorporated and administered in Guernsey and complies with the POI Law and the Rules (being the rules under which the Company was established in Guernsey)). The Company's register of members will continue to be maintained in Guernsey. Board composition and tax residency of the Company As mentioned above, in order to be eligible for REIT status, the Company (as the principal member of the Group) must be UK tax resident and not tax resident in any other jurisdiction. To become tax resident in the United Kingdom the Company would move its central management and control from Guernsey to the United Kingdom. This means that, once the Company has entered the REIT Regime, future Board and Shareholder meetings (including the annual general meeting) will be held in the United Kingdom. Reflecting this move in central management and control, it is proposed that Alison Ozanne will retire from the Board on the date that the Company enters the REIT Regime, being replaced by Stephen Bligh. Stephen Bligh is a fellow of the Institute of Chartered Accountants in England & Wales. He is Chairman of the Audit and Risk Committee for the Department of Business, Innovation and Skills and was an audit partner for 34 years with KPMG, specialising in the audit of FTSE 350 companies in property, construction, transport and professional firms. Whilst it is proposed that the Company will become UK tax resident, it is not intended that the tax residency of the property owning subsidiaries which are currently non-UK resident will change. Dividend policy and PIDs Following conversion to REIT status, the Company intends to maintain the same level of quarterly dividend payments as it currently makes. Based on the current level of dividends, this would exceed the 90 per cent. distribution condition under the REIT Regime, described below. The quarterly dividend of the Company for the period from 1 January 2015 to 31 March 2015, which is expected to be paid in May 2015, will be made in the normal way and will be paid free of any withholding tax. A dividend paid by the Company relating to profits or gains of the Qualifying Property Rental Business of the members of the Group (other than gains arising to non-UK resident members of the Group) is referred to as a "PID" or a "Property Income Distribution". Other normal dividends paid by the Company (including dividends relating to the Residual Business) are referred to as "Non-PID Dividends". As a principal company of a REIT Group, the Company will be required (to the extent permitted by law) to distribute to Shareholders (by way of cash or stock dividend), on or before the filing date for the principal company's tax return for the accounting period in question, at least 90 per cent. of the Group's property rental business profits as calculated for tax purposes (broadly, calculated using normal UK corporation tax rules) for the UK resident members of the REIT Group in respect of their Qualifying Property Rental Business and of the non-UK resident members of the REIT Group insofar as they are derived from their UK Qualifying Property Rental Business arising in each accounting period (the "90 per cent. distribution condition").Failure to meet this requirement will result in a tax charge levied on the Company and calculated by reference to the extent of the failure. Within the REIT Regime, distributions made by the Company may, in the hands of the Shareholders, comprise PIDs, Non-PID Dividends or a combination of the two. Under the REIT Regime, both PIDs and Non-PID Dividends are capable of being satisfied by stock dividends (in lieu of cash dividends). Where the Company distributes amounts over and above the minimum 90 per cent. distribution condition (as it is expected will be the case), the categorisation of these distributions as PIDs or Non-PID Dividends for UK tax purposes will depend on the source of the relevant profits (as attributed under specific rules set out in the tax legislation) and on any relevant designation made by the Company. As noted above, following conversion to REIT status, the Company intends to maintain the same level of quarterly dividend payments as it currently makes. Looking forward, the precise proportion of recurring property rental income that the Group distributes may vary between years. Ordinarily, the Board would expect to distribute a high proportion (including the mandatory PID element) of recurring net property rental earnings, on the basis of adjusted earnings per share as reported under IFRS. A proportion of trading profits and other residual income (if any) may also be distributed, to the extent the Board regards those earnings as sustainable. Capital gains arising on the disposal of investment properties will, ordinarily, be retained and reinvested within the business to support future growth. PIDs will be paid subject to deduction of basic rate income tax (currently 20 per cent.) unless the Company is satisfied that the relevant Shareholder qualifies for gross payment (which will depend on the particular circumstances and status of the Shareholder). For that purpose, the Company will require such Shareholders to submit a valid claim form (copies of which will be available on request from the Company's Registrars, Computershare Investor Services (Guernsey) Limited). Non-PID Dividends will not be subject to UK withholding tax. The comments in this announcement relating to the tax treatment of Shareholders are provided for general guidance only. Shareholders who are in any doubt concerning the taxation implications of any matters reflected here should consult their professional advisers. The Excessive Shareholder rule Within the REIT Regime, a tax charge may be levied on the Company if it makes a distribution to an Excessive Shareholder unless the Company has taken reasonable steps to avoid such a distribution being paid. Shareholders should note that this restriction only applies to Shareholders that are bodies corporate or are deemed to be bodies corporate for these purposes. The tax charge should not generally arise in respect of Shareholders which are nominees holding Ordinary Shares (and the relevant dividends) on behalf of other persons who are not themselves Excessive Shareholders. Under the REIT Regime an Excessive Shareholder is referred to as a "holder of excessive rights" which, broadly, means a company or other relevant entity treated as a body corporate which either directly or indirectly (i) is beneficially entitled to 10 per cent. or more of the Company's dividends or other distributions; (ii) is beneficially entitled to 10 per cent. or more of the Company's share capital; or (iii) controls 10 per cent. or more of the voting rights in the Company. The background to the charge recognises that in certain circumstances such Shareholders resident in jurisdictions with favourable double tax agreements with the UK can reclaim all or part of the UK income tax withheld on a distribution (e.g. on PIDs). The charge seeks to collect from the Company an amount of UK corporation tax equivalent to the basic rate income tax liability on the dividend irrespective of the tax treatment of the Shareholder. Although the Board is not currently aware (based on the information available to it) of any Shareholders who would constitute Excessive Shareholders, the Board considers it appropriate that the Company should put in place the mechanisms in accordance with the guidance issued by HMRC by which the Company can avoid the imposition of such a tax charge in circumstances where an Excessive Shareholding arises following its entry into the REIT Regime. The proposed changes to the Articles will give the Board the powers it needs to demonstrate to HMRC that such "reasonable steps" have been taken. These powers include, where necessary, the power to withhold payment of dividends to persons that the Company considers to be Excessive Shareholders. The New Articles The New Articles contain amendments to the existing Articles to facilitate the Company qualifying as a REIT as well as certain other minor amendments. The adoption of the New Articles is conditional upon the approval of Shareholders at the Extraordinary General Meeting and, if approved by Shareholders, the New Articles will take effect only when the Board notifies HMRC of its intention to become a REIT, which it expects to do during May 2015. A copy of the existing Articles and the New Articles marked to show the proposed changes will be available during normal business hours (Saturdays, Sundays and public holidays excepted) at the registered office of the Company and at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH up to and including close of business on 28 April 2015 and at the venue of the Extraordinary General Meeting for at least 15 minutes prior to the start of the meeting and up until the close of the meeting. 5. Expected timetable for entry into the REIT Regime This legislation provides that a company satisfying the conditions for REIT status may elect for the REIT Regime to apply with effect from a date that must be specified in the written notice given to HMRC. Subject to the passing of the Resolution at the Extraordinary General Meeting to be held on 28 April 2015, the Board intends to give written notice to HMRC for the Company to become the principal company of a REIT Group during May 2015. A new accounting period for tax purposes will begin on the date of entry into the REIT Regime. 6. Extraordinary General Meeting The Proposals are conditional on the approval by Shareholders of the Resolution to be proposed at the Extraordinary General Meeting of the Company which has been convened for 10.00 a.m. on 28 April 2015. At this Extraordinary General Meeting, Shareholders will be asked to consider and, if thought fit, approve the adoption of the New Articles. This resolution will be proposed as a special resolution which requires a majority of at least 75 per cent. of members entitled to vote and present in person or by proxy to vote in favour in order for it to be passed. All Shareholders are entitled to attend and vote at the Extraordinary General Meeting. In accordance with the Articles, all Shareholders entitled to vote and present in person or by proxy at the Extraordinary General Meeting shall upon a show of hands have one vote and upon a poll shall have one vote in respect of each Ordinary Share held. In order to ensure that a quorum is present at the Extraordinary General Meeting, it is necessary for two or more Shareholders holding 5 per cent. or more of the voting rights applicable at such meeting to be present in person or by proxy. 7. Guernsey Regulatory Notification The Commission has been notified of the Proposals pursuant to Part 5 of the Rules. 8. Recommendation The Board considers that the Proposals are in the best interests of the Company and its Shareholders as a whole. Accordingly the Board unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the Extraordinary General Meeting. The Directors intend to vote in favour of the Resolution in respect of their holdings of Ordinary Shares amounting to 304,880 Ordinary Shares in aggregate (representing approximately 0.06 per cent. of the issued share capital of the Company as at 30 March 2015). Capitalised terms used but not defined in this announcement will have the same meaning as set out in the Circular to Shareholders dated 31 March 2015. A copy of the Circular will shortly be submitted to the National Storage Mechanism and will be available for inspection at The Circular will also be available shortly on the Company's website at -ENDS- For further information: Schroder Real Estate Investment Management Limited 020 7658 6000 Duncan Owen / Nick Montgomery J.P. Morgan Cazenove: 020 7742 4000 William Simmonds Numis Securities: 020 7260 1000 David Benda Northern Trust: 01481 745529 David Sauvarin FTI Consulting: 020 3727 1000 Dido Laurimore / Ellie Sweeney
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