Landlords who are considering selling their buy-to-let portfolio because of increased taxes and regulations could have another alternative. A Real Estate Investment Trust, or REIT, could be a way of keeping a hand in the property sector without the hassle. Investors could continue earning an income and potential capital appreciation without having to deal with ever-increasing regulations, property maintenance and management.

REITs are companies which own or fund real estate in various property sectors to produce an income. Many REITs will be trading on the major stock exchanges. It is a way of enabling investors to own property and earn a dividend-based income and total returns. Investors would buy individual company stock and earn a share of the income through their investment. They would not have to actually go out and purchase, manage or finance the property themselves. Many REITs lease space and collect rent on properties. Shareholders are paid dividends from the income generated.

Landlords could sell their property portfolio to a REIT and swap their equity in that property for shares. In some cases, the transaction may qualify for incorporation relief or Capital Gains Tax rollover relief. If a buy-to-let portfolio meets the HMRC’s definition of a business, then it is possible to sell that business to a REIT for shares. This could be attractive to landlords who are looking at selling up but would still like to earn the same, or similar, returns that they can find in property investment. This way, they could sell their entire portfolio in one transaction with their tenants in situ. REITs have to distribute 90% of their pooled rental profits to the shareholders. Shares can also be sold at any time. Properties with mortgages can also be sold to a REIT, as the trust would pay off the mortgage. So if a landlord had mortgages of £500,000 and property worth £1 million, then he or she would receive £500,000 in shares.

The dividends are treated as property income for tax purposes. However, the shares can be held in either ISAs or Child Trust Funds, which can be more tax efficient. Obviously, investors should talk to a financial expert to make sure it is viable for them. Because REITs have to pay 90% of the rental income to their investors, it is difficult to build up the capital it needs to invest in new properties from its own earnings.