HCFT.L Regulatory News (HCFT)

25 Feb 2008 15:24

Highcroft Investments PLC25 February 2008 HIGHCROFT INVESTMENTS PLC ("Highcroft Investments") Proposed Conversion to a Real Estate Investment Trust Introduction The Highcroft directors were disappointed that the proposal to amend theArticles to permit conversion to a REIT was not successful at the EGM held on 13December 2007. The Board remains convinced of the merits of a REIT conversion asannounced after the EGM on 13 December 2007. Accordingly, the Company is todayposting a new circular to shareholders providing details, inter alia, on thebackground to and reasons for the proposed conversion. Shareholder approval isrequired for the proposed conversion and the circular also contains details ofan Extraordinary General Meeting that will be held on 19 March 2008. Background to our proposed REIT conversion The history of our announcements on this proposal is: • 21 March 2007: The Board was researching the practical steps needed toswitch our status to a REIT. • 23 May 2007: The Board had been notified that Kingerlee HoldingsLimited had received advice, on which it intended to act, which enabledHighcroft to convert to a REIT notwithstanding the fact that ownership of morethan 10 per cent. of the company's share capital would ordinarily be an obstacleto REITs conversion. • 13 November 2007: The Board sent a circular to Shareholders proposingamendments to the Articles that would allow the Company to convert to a REIT andstating why the Board believes the conversion of the Company to a REIT was inthe best interests of Shareholders as a whole. • 13 December 2007: The Board announced that the conversion to a REIT wasnot possible at that time. Having previously encouraged the proposed conversionto a REIT, Mr DG and MB Conn and associates, representing 18 per cent. of thoseentitled to vote at a general meeting of the Company voted against theresolution proposed at the EGM held on 13 December 2007. Therefore the Articlesof the Company could not be amended preventing the proposed conversion of theCompany to a REIT from 1 January 2008. The Board is now proposing to convert the Group into a REIT with effect from 1April 2008 in order to benefit from the provisions contained in Part 4 of theFinance Act 2006 and the related regulations made thereunder (the ''REITRegime''). The Company has again received confirmation from HMRC that, on thebasis of information supplied, the Group will be able to convert to REIT status,subject only to Shareholders' approval of the Resolution. The amendments proposed to be made to the Articles are required for the Group tobe confident that it will not incur a special charge to tax that can arise underthe REIT Regime. If these amendments are not approved by Shareholders, the Boardwill not be able to convert the Group into a REIT. Your attention is drawn tothe description of the proposed amendments to the Company's Articles set out inPart 4 of this circular and to the resolution in the Notice convening the EGM. 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 Plc. Highcroft Investments Plc 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 to vote against the proposed amendments to theArticles the conversion of the Group to a REIT would be blocked, resulting inHighcroft Investments continuing its current 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 of the property rentalbusiness immediately prior to entry into the REIT Regime. Although the exactamount of this charge cannot be known until the gross asset value of the Group'sproperty rental business immediately prior to entry into the REIT Regime isestablished, 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 (asdefined in Part 2 of this circular) and of the non-UK resident members of theGroup in respect of their UK qualifying property rental business. Thedistribution must be made on or before the filing date for the REITs tax returnfor the accounting period in question. Income profits for those purposes are tobe calculated, broadly, in accordance with normal 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. ormore of the shares or dividends of the Company; or • controls (directly or indirectly) 10 per cent. or more of the votingrights 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, to10 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 Groupto 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 aSubstantial Shareholding, unless the Board is satisfied that the SubstantialShareholder is not beneficially entitled to the dividends. A dividend paymentwithheld in these circumstances will be paid subsequently if the Board issatisfied that, at the time it is paid - the Substantial Shareholder concerned is not beneficially entitled tothe 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 beentransferred to a person who is not (and does not become) a SubstantialShareholder, or - sufficient Shares have been transferred (together with the right to thedividends) such that the Shares retained are no longer part of a SubstantialShareholding (in which case the dividend will be paid on the retained Shares),or • allow payment of a dividend on Shares that form part of a SubstantialShareholding if the Board is satisfied (having received a certificate containingappropriate confirmations and assurances from the Substantial Shareholder) thatthe Shareholder has disposed of his rights to dividends on such Shares to aperson who is not (and does not become) a Substantial Shareholder, or • seek to ensure that, if a dividend is paid on Shares that form part ofa Substantial Shareholding and that arrangements for the disposal of such rightsto a dividends on such Shares to a person who is not (and does not become) aSubstantial Shareholder are not in place, the Substantial Shareholder does notbecome beneficially entitled to the dividend. The proposed Resolution at the EGM if passed as a Special Resolution will amendthe Articles by the insertion of the following as new Articles 180-186immediately following Article 179. Subject to approval at the EGM of the changesto the Articles the Company will give notice to HMRC under section 109 of theFinance Act 2006 and will convert into a REIT with effect from 1 April 2008. Adescription of the proposed amendments to the Articles can be found in Part 4 ofthis circular and the text of the proposed amendments to the Articles is set outin 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, Groupcompanies with a qualifying property rental business will no longer pay UKdirect taxes on their income and capital gains from their qualifying propertyrental business. • Each company in the Group that carries on a qualifying property rentalbusiness will become liable to pay the entry charge, as described below. • It will be necessary to manage the Group and its businesses so as toensure that it will continue to meet the specified conditions for the REITRegime, 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 and in Part 2 of this circular. The Board believes that the Group currently meets the conditions for conversionto a REIT. The Board also believes that compliance with the continuingconditions and the other conditions described in Part 2 of this circular willnot materially affect the management, operations or financing of the Group inthe 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-ExemptBusiness 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 1April 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 March 2008, being the last day of the Group's current financial year. 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 as at 30 June 2007and is set out to illustrate the effect on the Group of converting into a REITas 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 April 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 831Release of deferred tax attributable to Tax-Exempt Business(3) 1,954 38 Pro forma net 44,938 869assets post-REIT conversion Notes 1. Net assets as at 30 June 2007 have been extracted without adjustmentfrom the unaudited consolidated interim results of the Group for the six monthsended 30 June 2007 (as announced on 6 August 2007). 2. The actual entry charge payable on conversion will depend, interalia, on the market value of the Group's property rental assets immediatelybefore conversion. 3. The actual deferred tax released will depend on the computation ofthat 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 Total Tax Exempt Residual Total Business £'000 Business £'000 Business Business £'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 84.00% 16.00% 100.00% 76.69% 23.31% 100.00%business - 75%Profits test (3) 1. Revenue, costs and other figures set out above have been extractedwithout adjustment from (i) the unaudited consolidated interim results of theGroup 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 31December 2006. 2. Group interest expense has been allocated across the Tax-ExemptBusiness and the Residual Business in line with the REIT regulations. 3. The proportion of the Group's Tax-Exempt Business and ResidualBusiness has been estimated based on the results and financial statementsreferred to in footnote 1 above in accordance with the provisions of the REITregulations. It should be noted that the Group did not prepare its financialstatements as at the relevant dates for the purpose of assessing its Tax-ExemptBusiness and Residual Businesses. The figures therefore represent an estimate ofthe balance of business of the Group and the actual balance of business as atthose dates may have differed from those shown in the table. Tax Exempt Residual Total Tax Exempt Residual Total Business Business £'000 Business Business £'000 £'000 £'000 £'000 £'000Total Assets(1) 40,051 11,953 52,004 42,057 11,994 54,051Balance of business 77.02% 22.98% 100.00% 77.81% 22.19% 100.00%- 75% assets test (2) Notes 1. Total assets have been extracted without adjustment from (i) theunaudited consolidated balance sheet of the Group as at 30 June 2007 (asannounced on 6 August 2007) and (ii) the consolidated balance sheet of the Groupas at 31 December 2006. 2. The proportion of the Group's Tax-Exempt Business and ResidualBusiness has been estimated based on the results and financial statementsreferred to in footnote 1 above in accordance with the provisions of the REITregulations. It should be noted that the Group did not prepare its financialstatements as at the relevant dates for the purpose of assessing its Tax-ExemptBusiness and Residual Business. The figures therefore represent an estimate ofthe balance of business of the Group and the actual balance of business as atthose 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 31December 2006 in order to comply with the 90 per cent. distribution test, whichis more than 50 per cent. greater than the actual dividend paid for the yearended 31 December 2006 of 13.7 pence per share; and • the Group corporation tax charge on income would have reduced byapproximately £396,000 and the Group corporation tax charge on gains would havereduced 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 theconditions relating to the Tax-Exempt Business, or an attempt by the Group toavoid tax, as sufficiently serious; • if the Group has committed a certain number of minor or inadvertentbreaches in a specified period; or • if HMRC has given the Group at least two or more notices in relation tothe 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 intoloans 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. Shareholders should note that it is possible that the Group could lose itsstatus as a REIT as a result of actions by third parties which are outside ofthe Group's control (for example, in the event of a successful takeover by aGroup that is not a REIT or due to a breach of the close company condition (asdescribed in more detail in Part 2 of this circular) which it is unable toremedy within a specified timeframe). Extraordinary General Meeting The EGM to consider the proposed conversion of the Company to a REIT will takeplace at 10 a.m. on Wednesday 19 March 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 17 March 2008 Extraordinary General Meeting 10 am on 19 March 2008 Anticipated date for the UK-REIT notification to HMRC on or before 20 March 2008 Anticipated date of UK-REIT conversion 1 April 2008 Anticipated date for amendments to Articles becoming effective 1 April 2008 25 February 2008 Enquiries: John Hewitt, Chairman 01865 840 023David Bowman, Finance DirectorHighcroft Investments plc Philip Davies / Freddy Crossley 020 7149 6000Charles Stanley Securities This information is provided by RNS The company news service from the London Stock Exchange