Schroder Real Regulatory News (SREI)

Schroder Real Estate Investment Trust Limited REIT Proposal Schroder Real Estate Investment Trust Limited (the "Company") has todaypublished a circular (the "Circular") to shareholders setting out proposals tobecome resident in the United Kingdom for tax purposes, to apply for entry tothe REIT Regime, to adopt New Articles and setting out a Notice ofExtraordinary General Meeting. 1. Introduction The Company was launched in July 2004 as an Authorised Closed-ended investmentscheme. The Company's investment objective is to provide Shareholders with anattractive level of income together with the potential for income and capitalgrowth through investing predominantly in UK commercial property. Both the Company and its property owning subsidiary companies are currentlynon-UK resident for UK tax purposes and are therefore not subject to UK tax oncapital gains. The property owning subsidiary companies are, however, subjectto UK income tax at the current rate of 20 per cent. on their taxable UKproperty income. In calculating the income tax liability of the property owning companies,certain allowances and expenses can be deducted, including interest payments onintra-group loans. For the Company's principal property owning company, SREITProperty Limited ("SREIT PL"), the level of interest which is permitted to betreated as deductible is determined in accordance with an Advanced ThinCapitalisation Agreement (an "ATCA") entered into with HMRC. SREIT PL enteredinto this agreement following the conclusion of an HMRC enquiry to securecertainty on intra-group interest deductibility for a five year period with theATCA terms also adopted for all other inter- group loans within the group. Thatagreement with HMRC expired on 31 March 2015. Based on advice received from theCompany'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 behigher, which would reduce net income and Shareholder returns. Since 1 January 2007 there has been legislation in place in the United Kingdomto enable qualifying companies (and groups) to apply for Real Estate InvestmentTrust (REIT) status. A company (or group) carrying on Qualifying PropertyRental Business may give notice to become a REIT, subject to meeting a numberof initial and on-going conditions. The main tax advantage of the REIT Regime is that the profits (i.e. income andgains) of a REIT's Qualifying Property Rental Business are exempt from UKincome tax and corporation tax. In very broad terms, what the regime seeks toachieve is to replicate as far as possible the tax treatment that would applyif the shareholders held UK property directly, by moving the taxation pointfrom the companies holding properties (within the REIT Group) to theshareholders. This is administered by the application of withholding tax ondistributions made by the principal company of the REIT Group. Although the principal rationale for the Proposals is to improve Shareholderreturns relative to the position as if the Proposals were not adopted, theremay also be a longer term benefit from converting to a REIT in terms ofimproved liquidity as a result of being able to access a wider potentialinvestor base. In order to facilitate the Group qualifying as a REIT, certain changes arerequired to the Articles. These changes take account of the REIT Regime,specifically the rules regarding the payment of dividends to ExcessiveShareholders and the requirement that the Company (as principal member of aREIT Group) be solely UK resident for tax purposes. If approved by Shareholders, the New Articles will only take effect when theBoard notifies HMRC of its intention to become a REIT, which it would expect todo during May 2015. The Extraordinary General Meeting will be held at TrafalgarCourt, Les Banques, St. Peter Port, Guernsey GY1 3QL at 10.00 a.m. on 28 April2015. 2. Background to conversion to REIT status A REIT is a company that either itself owns and operates a property rentalportfolio, which can be commercial, residential or any other type ofcommercially let property, or comprises a group of companies which carries outthese activities. Under the REIT Regime, at least 90 per cent. of the netrental income arising in the Qualifying Property Rental Business for eachaccounting period must be distributed to shareholders and in return, providedcertain conditions are met, the REIT Group is exempt from UK corporation taxand income tax on income and gains relating to its Qualifying Property RentalBusiness (i.e. broadly the property rental business of UK resident members ofthe REIT Group and the property rental business in the UK of non-UK residentmembers of the REIT Group). REITs are intended to enable the income from rented property assets to begenerated in a tax efficient manner and to ensure that the net return forshareholders from investing in property are broadly consistent with returnsfrom direct property investment. A group of companies which elects for REIT status is permitted to carry on bothtax-exempt property rental activities and other, taxable activities, subject tocertain restrictions which are set out in more detail in Part II of theCircular that is shortly to be submitted to the National Storage Mechanism andavailable for inspection at www.hemscott.com/nsm.do. The Board believes that the Company and, where relevant, the Group shouldcurrently satisfy the relevant conditions to be eligible for REIT status (savefor the condition in relation to tax residency which is considered in moredetail below in the sub paragraph headed "Board composition and tax residencyof the Company") and the Board expects the Group to continue doing so in thefuture. Prior to 17 July 2012, companies and groups entering the REIT Regime wererequired to pay a one off charge equal to 2 per cent. of the value of theirproperty assets. This conversion charge has been removed and if the Companywere 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 taxcharge borne by the Group will increase to £198,000. As noted above, the income tax payable by the Group to date has been computedwith reference to the ATCA agreed between SREIT PL and HMRC which determinesthe maximum amount of interest which is deductible on intra-group loans forSREIT PL. The ATCA expired on 31 March 2015 and the Board has sought advicefrom its tax advisors as to the likelihood of agreeing a new ATCA on the sameor similar terms. The level of deductible interest permitted by HMRC under anATCA is assessed with reference to current commercial lending practice and,based on current practice, the Company's tax advisors estimate that UK incometax payable is likely to increase to between £1,450,000 and £1,700,000 perannum. By converting to a REIT, the Group will no longer be subject to UK income taxon the rental income from its Qualifying Property Rental Business, providedthat it meets certain conditions. This should effectively reduce the overallburden of UK taxation for most Shareholders in respect of the QualifyingProperty Rental Business. The removal of this tax burden in relation to theGroup's Qualifying Property Rental Business should increase net income and theoverall profitability of the Group. As noted above, an ancillary benefit of the globally recognised "REIT brand" isthe ability to access a wider investor base, which may for example improveliquidity 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'sinvestment objective and policy as a consequence of conversion to a REIT. Electing for REIT status will not change the legal status of the Company, itscountry of incorporation or its share capital. The Company would continue to bean Authorised Closed- ended investment scheme in Guernsey (as long as itremains incorporated and administered in Guernsey and complies with the POI Lawand the Rules (being the rules under which the Company was established inGuernsey)). 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 (asthe principal member of the Group) must be UK tax resident and not tax residentin any other jurisdiction. To become tax resident in the United Kingdom theCompany would move its central management and control from Guernsey to theUnited 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 thatAlison Ozanne will retire from the Board on the date that the Company entersthe REIT Regime, being replaced by Stephen Bligh. Stephen Bligh is a fellow ofthe Institute of Chartered Accountants in England & Wales. He is Chairman ofthe Audit and Risk Committee for the Department of Business, Innovation andSkills and was an audit partner for 34 years with KPMG, specialising in theaudit of FTSE 350 companies in property, construction, transport andprofessional firms. Whilst it is proposed that the Company will become UK tax resident, it is notintended that the tax residency of the property owning subsidiaries which arecurrently non-UK resident will change. Dividend policy and PIDs Following conversion to REIT status, the Company intends to maintain the samelevel of quarterly dividend payments as it currently makes. Based on thecurrent level of dividends, this would exceed the 90 per cent. distributioncondition under the REIT Regime, described below. The quarterly dividend of theCompany for the period from 1 January 2015 to 31 March 2015, which is expectedto be paid in May 2015, will be made in the normal way and will be paid free ofany withholding tax. A dividend paid by the Company relating to profits or gains of the QualifyingProperty Rental Business of the members of the Group (other than gains arisingto 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 theextent permitted by law) to distribute to Shareholders (by way of cash or stockdividend), on or before the filing date for the principal company's tax returnfor the accounting period in question, at least 90 per cent. of the Group'sproperty rental business profits as calculated for tax purposes (broadly,calculated using normal UK corporation tax rules) for the UK resident membersof the REIT Group in respect of their Qualifying Property Rental Business andof the non-UK resident members of the REIT Group insofar as they are derivedfrom their UK Qualifying Property Rental Business arising in each accountingperiod (the "90 per cent. distribution condition").Failure to meet thisrequirement will result in a tax charge levied on the Company and calculated byreference to the extent of the failure. Within the REIT Regime, distributions made by the Company may, in the hands ofthe 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 beingsatisfied by stock dividends (in lieu of cash dividends). Where the Companydistributes amounts over and above the minimum 90 per cent. distributioncondition (as it is expected will be the case), the categorisation of thesedistributions as PIDs or Non-PID Dividends for UK tax purposes will depend onthe source of the relevant profits (as attributed under specific rules set outin the tax legislation) and on any relevant designation made by the Company. As noted above, following conversion to REIT status, the Company intends tomaintain the same level of quarterly dividend payments as it currently makes.Looking forward, the precise proportion of recurring property rental incomethat the Group distributes may vary between years. Ordinarily, the Board wouldexpect to distribute a high proportion (including the mandatory PID element) ofrecurring net property rental earnings, on the basis of adjusted earnings pershare as reported under IFRS. A proportion of trading profits and otherresidual income (if any) may also be distributed, to the extent the Boardregards those earnings as sustainable. Capital gains arising on the disposal ofinvestment properties will, ordinarily, be retained and reinvested within thebusiness to support future growth. PIDs will be paid subject to deduction of basic rate income tax (currently 20per cent.) unless the Company is satisfied that the relevant Shareholderqualifies for gross payment (which will depend on the particular circumstancesand status of the Shareholder). For that purpose, the Company will require suchShareholders to submit a valid claim form (copies of which will be available onrequest from the Company's Registrars, Computershare Investor Services(Guernsey) Limited). Non-PID Dividends will not be subject to UK withholdingtax. The comments in this announcement relating to the tax treatment of Shareholdersare provided for general guidance only. Shareholders who are in any doubtconcerning the taxation implications of any matters reflected here shouldconsult their professional advisers. The Excessive Shareholder rule Within the REIT Regime, a tax charge may be levied on the Company if it makes adistribution to an Excessive Shareholder unless the Company has takenreasonable steps to avoid such a distribution being paid. Shareholders shouldnote that this restriction only applies to Shareholders that are bodiescorporate or are deemed to be bodies corporate for these purposes. The taxcharge should not generally arise in respect of Shareholders which are nomineesholding Ordinary Shares (and the relevant dividends) on behalf of other personswho are not themselves Excessive Shareholders. Under the REIT Regime an Excessive Shareholder is referred to as a "holder ofexcessive rights" which, broadly, means a company or other relevant entitytreated as a body corporate which either directly or indirectly (i) isbeneficially entitled to 10 per cent. or more of the Company's dividends orother distributions; (ii) is beneficially entitled to 10 per cent. or more ofthe Company's share capital; or (iii) controls 10 per cent. or more of thevoting rights in the Company. The background to the charge recognises that in certain circumstances suchShareholders resident in jurisdictions with favourable double tax agreementswith the UK can reclaim all or part of the UK income tax withheld on adistribution (e.g. on PIDs). The charge seeks to collect from the Company anamount of UK corporation tax equivalent to the basic rate income tax liabilityon the dividend irrespective of the tax treatment of the Shareholder. Although the Board is not currently aware (based on the information availableto it) of any Shareholders who would constitute Excessive Shareholders, theBoard considers it appropriate that the Company should put in place themechanisms in accordance with the guidance issued by HMRC by which the Companycan avoid the imposition of such a tax charge in circumstances where anExcessive Shareholding arises following its entry into the REIT Regime. Theproposed changes to the Articles will give the Board the powers it needs todemonstrate to HMRC that such "reasonable steps" have been taken. These powersinclude, where necessary, the power to withhold payment of dividends to personsthat the Company considers to be Excessive Shareholders. The New Articles The New Articles contain amendments to the existing Articles to facilitate theCompany qualifying as a REIT as well as certain other minor amendments. Theadoption of the New Articles is conditional upon the approval of Shareholdersat the Extraordinary General Meeting and, if approved by Shareholders, the NewArticles will take effect only when the Board notifies HMRC of its intention tobecome a REIT, which it expects to do during May 2015. A copy of the existing Articles and the New Articles marked to show theproposed changes will be available during normal business hours (Saturdays,Sundays and public holidays excepted) at the registered office of the Companyand at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M7SH up to and including close of business on 28 April 2015 and at the venue ofthe Extraordinary General Meeting for at least 15 minutes prior to the start ofthe 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 REITstatus may elect for the REIT Regime to apply with effect from a date that mustbe specified in the written notice given to HMRC. Subject to the passing of theResolution 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 theprincipal company of a REIT Group during May 2015. A new accounting period fortax 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 Resolutionto be proposed at the Extraordinary General Meeting of the Company which hasbeen convened for 10.00 a.m. on 28 April 2015. At this Extraordinary GeneralMeeting, Shareholders will be asked to consider and, if thought fit, approvethe adoption of the New Articles. This resolution will be proposed as a specialresolution which requires a majority of at least 75 per cent. of membersentitled to vote and present in person or by proxy to vote in favour in orderfor it to be passed. All Shareholders are entitled to attend and vote at the Extraordinary GeneralMeeting. In accordance with the Articles, all Shareholders entitled to vote andpresent in person or by proxy at the Extraordinary General Meeting shall upon ashow of hands have one vote and upon a poll shall have one vote in respect ofeach Ordinary Share held. In order to ensure that a quorum is present at theExtraordinary General Meeting, it is necessary for two or more Shareholdersholding 5 per cent. or more of the voting rights applicable at such meeting tobe present in person or by proxy. 7. Guernsey Regulatory Notification The Commission has been notified of the Proposals pursuant to Part 5 of theRules. 8. Recommendation The Board considers that the Proposals are in the best interests of the Companyand its Shareholders as a whole. Accordingly the Board unanimously recommendsthat Shareholders vote in favour of the Resolution to be proposed at theExtraordinary General Meeting. The Directors intend to vote in favour of theResolution in respect of their holdings of Ordinary Shares amounting to 304,880Ordinary Shares in aggregate (representing approximately 0.06 per cent. of theissued share capital of the Company as at 30 March 2015). Capitalised terms used but not defined in this announcement will have the samemeaning as set out in the Circular to Shareholders dated 31 March 2015. A copy of the Circular will shortly be submitted to the National StorageMechanism and will be available for inspection at www.hemscott.com/nsm.do. The Circular will also be available shortly on the Company's website atwww.srei.co.uk. -ENDS- For further information: Schroder Real Estate Investment Management Limited 020 7658 6000Duncan Owen / Nick Montgomery J.P. Morgan Cazenove: 020 7742 4000William Simmonds Numis Securities: 020 7260 1000David Benda Northern Trust: 01481 745529David Sauvarin FTI Consulting: 020 3727 1000Dido Laurimore / Ellie Sweeney