I think there’s a strong chance that real estate investment trusts (REITs) could get a big boost from the upcoming UK Budget. So this might be a good time to consider buying them.
The details of the Budget will be revealed on 26 November. And while there’s a lot that’s uncertain, investors should be thinking now about changes that could be on the way.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
What are REITs?
REITs are companies that own and lease real estate in the form of houses, offices, warehouses, or just about any kind of property. And they have a unique tax-advantaged status.
Unlike other companies, REITs don’t pay any tax on their income. But they have to return 90% of what they make to investors in the form of dividends.
This makes them very efficient income sources. Where buy-to-let investors have to pay tax on their rental income, REITs can distribute cash to shareholders without having to do this.
Furthermore, savvy REIT investors can use a Stocks and Shares ISA or a SIPP to protect themselves from dividend tax. This is a big benefit – and it might be about to get bigger…
Tax brackets
The Chancellor had been rumoured to be considering increasing income tax. But while that’s been ruled out, a freeze on tax thresholds now seems more likely.
That means people stand to pay more tax as their income increases. And it affects landlords, who pay tax on their rental income.
REIT investors who invest using an ISA or a SIPP, by contrast, are set to be unaffected. And that could make REITs even more attractive to investors than buy-to-let properties.
If this happens, REITs across the board could get a boost. So now might be the time for investors to have a serious look at the passive income opportunities on offer.
London housing
One name that I think is particularly interesting is Grainger (LSE:GRI). The firm only became a REIT a couple of months ago, but it has a really interesting portfolio of houses.
Around half of the firm’s properties are located in London. As a result, it benefits from strong demand and there’s not much available space for building, so supply is naturally limited.
One potential risk is the possibility of future changes in rental legislation creating costs and weighing on returns. But it’s worth noting this is also an issue for buy-to-let investors.
At least with Grainger, investors get a management team to deal with this for them. And with roughly 4,500 more properties in the pipeline, the portfolio looks set to grow.
Long-term thinking
Investors should be thinking about how the upcoming UK Budget might reshape their portfolios. And that includes the rental market and income-generating property investments.
The point isn’t just to be one step ahead of a potential boost in share prices. It’s to be own assets that have better long-term prospects.
If income tax thresholds staying fixed pushes up the amount of tax landlords pay on their rental income, this could benefit the owners of REITs over buy-to-let properties. And it’s being reported as a serious possibility.
As a result, I think investors should take a look at the opportunities in the REIT sector in the UK right now. And Grainger is a new name that’s worth serious attention.
