HCFT.L Regulatory News (HCFT)

13 Nov 2007 15:41

Highcroft Investments PLC13 November 2007 HIGHCROFT INVESTMENTS PLC ("Highcroft Investments") Proposed Conversion to a Real Estate Investment Trust Introduction As announced in our annual report on 21 March 2007, and confirmed at our AnnualGeneral Meeting on 23 May 2007, the Board is proposing to convert the Group intoa REIT with effect from 1 January 2008 in order to benefit from the provisionscontained in Part 4 of the Finance Act 2006 and the related regulations madethereunder (the ''REIT Regime''). The Company has received confirmation fromHMRC that, on the basis of information supplied, the Group will be able toconvert to REIT status with effect from 1 January 2008, subject to Shareholders'approval of the Resolution. Accordingly, the Company is today posting a circular to shareholders providingdetails, inter alia, on the background to and reasons for the proposedconversion. Shareholder approval is required for the proposed conversion andthe circular also contains details of an Extraordinary General Meeting that willbe held on 13 December 2007. The amendments proposed to be made to the Company's Articles are required forthe Group to be confident that it will not incur a special charge to tax thatcan arise under the REIT Regime. If these amendments are not approved byShareholders, the Board will not convert the Group into a REIT. By converting to a REIT, the Group will no longer pay UK direct tax on theprofits and gains from its qualifying property rental businesses in the UKprovided that it meets certain conditions. Non-qualifying profits and gains ofthe Group will continue to be subject to corporation tax. Kingerlee Holdings Limited ("Kingerlee") currently holds 25.32 per cent. of theissued share capital of Highcroft Investments. Highcroft Investments hasreceived a notification from Kingerlee that it will support the conversion ofthe Group to a REIT and take action to facilitate its progress. However, it mustbe noted that were Kingerlee unable to take the necessary actions or were it tovote against the proposed amendments to the Articles the conversion of the Groupto a REIT would be blocked, resulting in Highcroft Investments continuing itscurrent legal and taxation status. On entering the REIT Regime, each UK resident company that is a member of theGroup and carries on a qualifying property rental business in the UK or overseasand any non-UK resident member of the Group that carries on a qualifyingproperty rental business in the UK will be subject to an entry tax charge equalto 2 per cent. of the market value of the gross assets in value of the propertyrental business immediately prior to entry into the REIT Regime. Although theexact amount of this charge cannot be known until the gross asset value of theGroup's property rental business immediately prior to entry into the REIT Regimeis established, the Board estimate (based on the unaudited consolidated interimresults of the Group for the six months ended 30 June 2007) that the chargecould be approximately £800,000. If the Group converts to a REIT it will be required to distribute toShareholders (by way of dividend) at least 90 per cent. of the income profits ofthe UK-resident members of the Group in respect of their Tax-Exempt Business andof the non-UK resident members of the Group in respect of their UK qualifyingproperty rental business. The distribution must be made on or before the filingdate for the REITs tax return for the accounting period in question. Incomeprofits for those purposes are to be calculated, broadly, in accordance withnormal tax rules. Under the REIT Regime, a tax charge may be levied if the Company makes adistribution to a company which: • is beneficially entitled (directly or indirectly) to 10 per cent. or more of the shares or dividends of the Company; or • controls (directly or indirectly) 10 per cent. or more of the voting rights of the Company unless the Company has taken ''reasonable steps'' to avoid such a distributionbeing paid. Under the REIT Regime, a tax charge may be levied on the Company ifit makes a distribution to a person (which is, broadly, defined as a company)which is beneficially entitled (directly or indirectly) to 10 per cent or moreof the Shares or dividends of Highcroft Investments or controls (directly orindirectly) 10 per cent or more of the voting rights of Highcroft Investments.If, however, the Company has taken "reasonable steps" to prevent the possibilityof such a distribution being made, then this tax charge should not arise. Proposed amendments to the Articles The proposed amendments to the Articles are intended to give the Board thepowers it needs to demonstrate to HMRC that such "reasonable steps" have beentaken. The Board considers these proposals to be consistent with the currentdraft HMRC guidance on what constitutes "reasonable steps". If adopted the amendments to the Articles • provide the Directors with power to identify Substantial Shareholders (that is a holder of Shares which entitle the holder, directly or indirectly, to 10 per cent or more of the Shares, dividends or voting control of the Company). This is necessary as a Substantial Shareholder could cause a member of the Group to be liable to pay tax under regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006. • prohibit the payment of dividends on Shares that form part of a Substantial Shareholding, unless the Board is satisfied that the Substantial Shareholder is not beneficially entitled to the dividends. A dividend payment withheld in these circumstances will be paid subsequently if the Board is satisfied that, at the time it is paid the Substantial Shareholder concerned is not beneficially entitled to the dividend, or the shareholding is not part of a Substantial Shareholding, or all or some of the Shares (and the right to the dividends) have been transferred to a person who is not (and does not become) a Substantial Shareholder, or sufficient Shares have been transferred (together with the right to the dividends) such that the Shares retained are no longer part of a Substantial Shareholding (in which case the dividend will be paid on the retained Shares). • allow payment of a dividend on Shares that form part of a Substantial Shareholding if the Board is satisfied (having received a certificate containing appropriate confirmations and assurances from the Substantial Shareholder) that the Shareholder has disposed of his rights to dividends on such Shares to a person who is not (and does not become) a Substantial Shareholder • seek to ensure that, if a dividend is paid on Shares that form part of a Substantial Shareholding and that arrangements for the disposal of such rights to a dividends on such Shares to a person who is not (and does not become) a Substantial Shareholder are not in place, the Substantial Shareholder does not become beneficially entitled to the dividend The proposed Resolution at the EGM in respect of which the Group has given avalid notice under section 109 of the Finance Act 2006, the Articles will beamended by the insertion of the following as new Articles 180-186 immediatelyfollowing Article 179. Subject to approval at the EGM the changes to theArticles the Company will convert into a REIT. A description of the proposedamendments to the Articles can be found in Part 4 of this circular and the textof the proposed amendments to the Articles is set out in the Notice of EGM. Implications of REIT status for the Group The principal implications for the Group of conversion into a REIT are: • Provided the conditions for being a REIT continue to be met, Group companies with a qualifying property rental business will no longer pay UK direct taxes on their income and capital gains from their qualifying property rental business. • Each company in the Group that carries on a qualifying property rental business will become liable to pay the entry charge, as described below. • It will be necessary to manage the Group and its businesses so as to ensure that it will continue to meet the specified conditions for the REIT Regime, in particular: • the 90 per cent. distribution test • the ''balance of business'' tests, being • the 75 per cent. profits test, and • the 75 per cent. assets test. Each of these tests is discussed below. The Board believes that the Group currently meets the conditions for conversionto a REIT. The Board also believes that compliance with the continuingconditions will not materially affect the management, operations or financing ofthe Group in the future. Impact on net assets Conversion to REIT status will have an impact on the balance sheet and netassets of the Group. The principal impact arising on conversion to a REIT willbe: • the liability to pay the 2 per cent. entry charge; and • the release of deferred tax provided in respect of the Tax-Exempt Business of the Group, including that provided on portfolio revaluations. The actual entry charge, which will be payable by instalments on 14 July 2008,14 October 2008, 14 January 2009 and 14 April 2009 (if conversion occurs on 1January 2008), will depend on the market value of qualifying property rentalassets at the date of conversion. For the purpose of calculating the entrycharge, the Board intends to undertake a valuation of the relevant Group assetsas at 31 December 2007, being the last day of the Group's current financialyear. If the Group had converted into a REIT on 1 July 2007, the estimated impact onthe balance sheet and net assets of the Group as at that date would have been asset out in the table below. The table is based on the unaudited consolidatedbalance sheet and net asset position of Highcroft Investments Plc as at 30 June2007 and is set out to illustrate the effect on the Group of converting into aREIT as if conversion had occurred as at 1 July 2007. It has been prepared forillustrative purposes only and does not represent the actual effect on thefinancial position of the Group that conversion to a REIT on 1 January 2008 willhave. Net assets attributable to Shareholders Total per share £'000 (p) Net assets as at 30 June 2007(1) 43,785 847Estimated Entry Charge(2) (801) (16) ________ ________ 42,984 831 Release of deferred tax attributable toTax-Exempt Business(3) 1,954 38 ________ ________Pro forma net assets post-REIT conversion 44,938 869 Notes 1. Net assets as at 30 June 2007 have been extracted without adjustment from the unaudited consolidated interim results of the Group for the six months ended 30 June 2007 (as announced on 6 August 2007). 2. The actual entry charge payable on conversion will depend, inter alia, on the market value of the Group's property rental assets immediately before conversion. 3. The actual deferred tax released will depend on the computation of that liability as at conversion. Balance of business tests Based on the Group's financial results for the financial year ended 31 December2006 and the six months ended 30 June 2007, had the relevant 75 per cent.profits test and the 75 per cent. assets test as at, and for the periods endedon, those dates, been performed the result of those tests for the Group wouldhave been approximately as set out in the tables below. The tables are based onthe unaudited consolidated interim results of the Group for the six months ended30 June 2007, the unaudited consolidated balance sheet of the Group as at 30June 2007, the consolidated financial statements of the Group for the year ended31 December 2006 and the consolidated balance sheet of the Group as at 31December 2006. They have been prepared for illustrative purposes only and,because of their nature, address a hypothetical situation and therefore do notrepresent the actual financial position or results of the Group. Six months ended 30 June 2007 (1) Year ended 31 December 2006(1)75% Profit Test Tax Exempt Residual Tax Exempt Residual Business Business Total Business Business Total £'000 £'000 £'000 £'000 £'000 £'000 Group Revenue 1,055 168 1,223 2,038 489 2,527Costs 111 71 182 263 121 384 _______ _______ _______ _______ _______ _______ Operating Profit 944 97 1,041 1,775 368 2,143Interest Expense 185 2 187 278 1 279Interest Income 2 50 52 3 89 92 _______ _______ _______ _______ _______ _______ Profit before tax 761 145 906 1,500 456 1,956 _______ _______ _______ _______ _______ _______ Balance of business - 75%Profits test (3) 84.00% 16.00% 100.00% 76.69% 23.31% 100.00% 1. Revenue, costs and other figures set out above have been extracted without adjustment from (i) the unaudited consolidated interim results of the Group for the six months ended 30 June 2007 (as announced on 6 August 2007), and (ii) the consolidated financial statements of the Group for the year ended 31 December 2006. 2. Group interest expense has been allocated across the Tax-Exempt Business and the Residual Business in line with the REIT regulations. 3. The proportion of the Group's Tax-Exempt Business and Residual Business has been estimated based on the results and financial statements referred to in footnote 1 above in accordance with the provisions of the REIT regulations. It should be noted that the Group did not prepare its financial statements as at the relevant dates for the purpose of assessing its Tax-Exempt Business and Residual Businesses. The figures therefore represent an estimate of the balance of business of the Group and the actual balance of business as at those dates may have differed from those shown in the table. Tax Exempt Residual Tax Exempt Residual Business Business Total Business Business Total £'000 £'000 £'000 £'000 £'000 £'000 Total Assets(1) 40,051 11,953 52,004 42,057 11,994 54,051 Balance of business - 75% assets test (2) 77.02% 22.98% 100.00% 77.81% 22.19% 100.00% _______ _______ _______ _______ _______ _______ Notes 1. Total assets have been extracted without adjustment from (i) the unaudited consolidated balance sheet of the Group as at 30 June 2007 (as announced on 6 August 2007) and (ii) the consolidated balance sheet of the Group as at 31 December 2006. 2. The proportion of the Group's Tax-Exempt Business and Residual Business has been estimated based on the results and financial statements referred to in footnote 1 above in accordance with the provisions of the REIT regulations. It should be noted that the Group did not prepare its financial statements as at the relevant dates for the purpose of assessing its Tax-Exempt Business and Residual Business. The figures therefore represent an estimate of the balance of business of the Group and the actual balance of business as at those dates may have differed from those shown in the table. Based on the financial position of the Group as at 30 June 2007, and for the sixmonth period ended 30 June 2007, and as at 31 December 2006, and for the yearended 31 December 2006, the Group would have met both the 75 per cent. profitstest and the 75 per cent. assets test for the relevant periods. It should benoted that the tables above are illustrative only and there is no guarantee thatfollowing conversion into a REIT the Group will continue to meet the 75 percent. profits test and the 75 per cent. assets test in future. However, theBoard expects that the Group will continue to be able to meet these tests in theforeseeable future. Distribution requirement and impact on Group tax position Under the 90 per cent. distribution test, the Group will be required todistribute (by way of dividend) at least 90 per cent. of the income profits ofthe Tax-Exempt Business of the Group (as shown in financial statements to bedrawn up on a tax basis by the Group in accordance with the statutory provisionsgoverning the REIT Regime). These profits may be substantially different fromthe Group's reported income profits or the indicative figures presented abovefor the 75 per cent. profits test, for example due to the availability ofcapital allowances and other tax adjustments. In particular, interest receivedby one Group member from another may, in certain circumstances, be treated astaxable income of the Residual Business for REIT purposes without acorresponding deduction in the paying company, which could lead to additionaldifferences. On the basis of the income analysis set out in the 75 per cent. profits testtable above and assuming that the Group had been a REIT for the year ended 31December 2006, it is estimated that: • the Group would have needed to pay a Property Income Distribution or '' PID'' of not less than 20.76 pence per share in respect of the year ended 31 December 2006 in order to comply with the 90 per cent. distribution test, which is more than 50 per cent. greater than the actual dividend paid for the year ended 31 December 2006 of 13.7 pence per share; and • the Group corporation tax charge on income would have reduced by approximately £396,000 and the Group corporation tax charge on gains would have reduced by approximately £148,000. Exit from the REIT regime The Group can give notice to HMRC that it wants the Group to leave the REITRegime at any time. The Board retains the right to decide to exit the REITRegime at any time in the future without shareholder consent, if it considersthis to be in the best interests of the Company, the Group or shareholders as awhole. If the Group voluntarily leaves the REIT Regime within ten years of joining anddisposes of any property or other asset that was involved in its qualifyingproperty rental business within two years of leaving, any uplift in the basecost of the property as a result of the deemed disposal on entry into the REITregime is disregarded in calculating the gain or loss on the disposal. However,there is no repayment of the entry charge in these circumstances. It is important to note that the Group cannot guarantee continued compliancewith all of the REIT conditions and that the REIT Regime may cease to apply insome circumstances. HMRC may require the Group to exit the REIT Regime if: • it regards a breach of the conditions, failure to satisfy the conditions relating to the Tax-Exempt Business, or an attempt by the Group to avoid tax, as sufficiently serious; • if the Group has committed a certain number of minor or inadvertent breaches in a specified period; or • if HMRC has given the Group at least two or more notices in relation to the avoidance of tax within a ten year period. In addition, if the conditions for REIT status relating to: • the share capital of the Company, or the prohibition on entering into loans with abnormal returns are breached, or • if the Company ceases to be resident solely in the UK for tax purposes, or • becomes an open-ended investment company, or • ceases to be listed, or • (in certain circumstances) ceases to fulfil the close company condition (which is described in Part 2 of this Circular), the Group will automatically lose REIT status. Where the Group is required toleave the REIT Regime within ten years of joining, HMRC has wide powers todirect how it is to be taxed, including in relation to the date on which theGroup is treated as exiting the REIT Regime. It is possible that the Group could lose its status as a REIT as a result ofactions by third parties which are outside of the Group's control (for example,in the event of a successful takeover by a Group that is not a REIT or due to abreach of the close company condition which it is unable to remedy within aspecified timeframe). Extraordinary General Meeting The EGM to consider the proposed conversion of the Company to a REIT will takeplace at 10 a.m. on Tuesday 11 December and will be held at the offices of GrantThornton, 1 Westminster Way, Oxford, OX2 0PZ. Expected Timetable Latest time and date for receipt of completed Form of Proxyand CREST proxy instruction 10 am on 11 December 2007 Extraordinary General Meeting 10 am on 13 December 2007 Anticipated date for the UK-REIT notification to HMRC on or before 14 December 2007 Anticipated date of UK-REIT conversion 1 January 2008 Anticipated date for amendments to Articles becoming effective 1 January 2008 13 November 2007 Enquiries: John Hewitt, Chairman 01865 840 023David Bowman, Finance DirectorHighcroft Investments plc Philip Davies / Freddy Crossley 020 7149 6000Charles Stanley Securities DEFINITIONS "Articles" the articles of association of Highcroft Investments Plc; "Board" or "Directors" as the context requires, the board of directors of Highcroft Investments Plc; "Close Company" a close company as defined in section 414 of the Income and Corporation Taxes Act 1988 as amended by section 106 (6) of the Finance Act 2006; "Company" or "Highcroft Investments" Highcroft Investments Plc; "CREST" the relevant system (as defined in the CREST Regulations) in respect of which CRESTco Limited is the Operator (as defined in the CREST Regulations); "CREST Regulations" the Uncertified Securities Regulations 2001; "Distribution" any dividend or other distribution on or in respect of the shares of the Company including a distribution not involving a cash payment being made; "Distribution Transfer" a disposal or transfer by a Person of his rights to a Distribution from the Company such that he is not beneficially entitled (directly or indirectly) to such a Distribution and no Person who is so entitled subsequent to such disposal or transfer is (whether as a result of the transfer or not) a Substantial Shareholder; "Distribution Transfer a certificate in such form as the Directors may specify Certificate" from time to time to the effect that the relevant Person has made a Distribution Transfer, which certificate may be required by the Directors to satisfy them that a Substantial Shareholder is not beneficially entitled to a Distribution; "EGM" Extraordinary General Meeting of the Company to be held at 10.00 a.m., 13 December 2007 at the offices of Grant Thornton, 1 Westminster Way, Oxford, OX2 0PZ; "Excess Charge" in relation to a Distribution which is paid or payable to a Person, all tax or other amounts which the Director s consider may become payable by the Company or any other member of the Group under Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (as such regulation may be modified, supplemented or replaced from time to time) and any interest, penalties, fines or surcharge attributable to such tax as a result of such Distribution being paid to or in respect of that Person; "Group" the Company and other companies in its group for the purposes of section 134 of the Finance Act 2006 (as such sections may be modified, supplemented or replaced from time to time); "HMRC" HM Revenue & Customs; "interest in the Company" includes, without limitation, an interest in a Distribution made or to be made by the Company; "Non-PID Dividend" any dividend other than a PID received by a shareholder of a company; "Ordinary Shares" ordinary shares of 25p each in the capital of the Company having the rights ascribed and being subject to the restrictions set out in the Articles; "Ordinary Shareholders" or " Shareholders" holders of Ordinary Shares; "Person" includes a body of Persons, corporate or unincorporated, wherever domiciled; "Property Income Distribution" or "PID" a dividend received by a shareholder of a company in respect of profits and gains of the Tax-Exempt Business of the UK Resident members of the Group, earned whilst the Group is a UK-REIT, or in respect of the profits or gains of a non-UK resident member of the Group insofar as they derive from its UK qualifying rental business; "property rental business" a schedule A business within the meaning of section 832 (1) of the Income and Corporation Taxes Act 1988 or an overseas property business within the meaning of section 704(4) of such Act, but in each case, excluding certain specified types of business; "qualifying property rental a property rental business fulfilling the conditions in business" section 107 of the Finance Act 2006; "REIT" Real Estate Investment Trust as defined in Part 4 of the Finance Act 2006; "REIT Regime" the provisions contained in Part 4 of the Finance Act 2006; "Registrars" Capita Registrars; "Relevant Registered a shareholder who holds all or some of the shares in the Shareholder" Company that comprise a Substantial Shareholding (whether or not a Substantial Shareholder); "Reporting Obligation" any obligation from time to time of the Company to provide information or reports to HMRC as a result of or in connection with the Company's status as a REIT; "Residual Business" the business of the Group other than the qualifying property rental business; "Resolution" the resolution proposed to be passed at the EGM in the f orm set out in the Notice of the EGM; "Substantial Shareholding" the shares in the Company in relation to which or by virtue of which (in whole or in part) a Person is a Substantial Shareholder; "Substantial Shareholder" any person whose interest in the Company, whether legal or beneficial, direct or indirect, may cause any member of the Group to be liable to pay tax under Regulation 10 of the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (as such regulations may be modified, supplemented or replaced from time to time) on or in connection with the making of a Distribution to or in respect of such Person including, at the date of adoption of Articles 180 to 186 any holder of excessive rights as defined in the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006; and "Tax-Exempt Business" the Group's qualifying property rental businesses in the UK and elsewhere for the purposes of Part 4 of the Finance Act 2006. 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