One major advantage of bringing a company within the REIT regime is that the chargeable gain base cost of properties held within the taxexempt business at the time of entry is increased to the market value of the property at that time. This will be particularly attractive for a company with a low cost base on a property and hence an inherent chargeable gain without the benefits of the REIT regime. But, there are three points to watch out for:

• how was the entry fee paid? There is currently an entry charge of just 2% of market value (divided by the applicable tax rate for the company). Each company in a group REIT is responsible for paying its own entry fee. A purchaser should therefore quantify how the market value (and thus the entry fee) was calculated; whether the entry fee (or part) is still outstanding (and, if so, how this will be dealt with when agreeing the price for the property). Specific warranties should be sought. If the entry fee is payable in instalments, then do not forget that the total amount due is greater than if the one-off fee were paid (and do not forget if a company ceases to be within the REIT regime then early payment of remaining instalments may come into effect);
• the limitations of base cost uplift. Although the base cost uplift is not affected by a company leaving the REIT (eg on the sale to a non-REIT entity), the uplift is cancelled if the property is sold out of the company within two years of the company leaving the REIT regime (assuming the company was in the REIT regime for less than ten years). This is an important point, especially if the company holds a portfolio of properties, some of which the buyer plans to sell within two years of acquiring the company. If that happens, the company could become liable for a much larger tax bill than was anticipated when the entity was purchased. It follows then that further information on the tax affairs of the company pre-entry into the REIT regime should be reviewed to enable a full assessment to be made;
• have REIT conditions been complied with by the group company? Selling a company out of a group REIT is one potential way to trigger that company leaving the REIT regime. However, failure by the group REIT as a whole to comply with the necessary conditions can, in extreme situations, lead to the REIT regime ceasing to apply to the group as a whole. If a major breach (or a series of minor breaches) occurred in the year in which the group initially entered the regime, this could effectively mean that the group had never actually been within the REIT regime at all. Accordingly, there would never have been an uplift in base cost of the properties. This is probably an unlikely situation, but it is one that should usually be addressed by specific indemnities from the seller company group.

This is a complex area. The point of this note is to emphasise that those who are buying property-rich companies from REITs should be aware that there are detailed tax issues that have to be considered, and pitfalls to be avoided. For an excellent introductory article see [2007] 191 Property Law Journal 11. © Practical Lawyer