The decision by UK Chancellor of the Exchequer Alastair Darling not to open up the regime for tax-transparent real estate investment trusts (REITs) to a wider range of businesses with large property holdings has met with a mixed response.

The decision by UK Chancellor of the Exchequer Alastair Darling not to open up the regime for tax-transparent real estate investment trusts (REITs) to a wider range of businesses with large property holdings has met with a mixed response.

Financial services group PricewaterhouseCoopers accused the Chancellor of missing an opportunity to expand the REIT system. Commenting on the chancellor's pre-Budget speech on Monday, PwC said Darling could have tweaked the REIT system, introduced in January 2007, to cover residential property. This would, PwC argued, have attracted institutional investment to the ailing housing sector.

The Chancellor's decision to stop businesses with insufficient rental income from third-party tenants from converting to REITS will not only limit expansion of the scheme, but will not help investment in housing, PwC said. Rosalind Rowe, a real estate tax partner at PwC, said: 'The decision today to stop certain businesses from converting to REITS through lack of income from third-party tenants will undoubtedly limit the usage of this particular tax regime. However, the government’s approach which, in future, will extend the income tests to the activity of a wider economic group, will stop residential landlords from converting. They need income from ‘turning’ part of their property portfolio to boost returns to acceptable levels.'

However, KPMG, another financial services giant, broadly supported the Chancellor's move as prudent. Charles Beer, senior partner in KPMG's real estate tax group in the UK, said the REIT rules were being changed to ensure that groups which are not genuine property investment businesses cannot convert to the regime.

'The Chancellor has taken action to prevent the potential loss of hundreds of millions in tax,' Beer said. 'He has made clear that REIT status, which gives tax exemption for income from property, will remain restricted to genuine property investment businesses.'

The UK government, Beer said, had become increasingly concerned that property-rich businesses such as pub groups, supermarket chains and others could restructure their businesses so as to come within the REIT rules on technical grounds. A number of groups have announced they were considering such a move, and the loss of tax involved could have been considerable.

'This measure will prevent such an approach by many groups, but it will be important to ensure that the new provisions do not cause difficulty for genuine property investment groups. We understand that pub groups with mainly tenanted estates may still be allowed to join the REIT regime.'

There are 20 REITs in the UK, representing a total market capitalisation of £13.8 bn (EUR 16.1 bn).