The number of REITs in breach of the special tax-exempt regime has nearly quadrupled over the past year, according to data analysis by international law firm BCLP.

HMRC was notified of 26 REIT tax regime breaches in 2023-24, compared with just seven the previous year.

Qualifying REITs are exempt from UK tax on the income and gains from their property rental businesses, providing they distribute at least 90% of taxable rental income to shareholders as property income distributions (PIDs), which are taxed at the shareholder level.

The data reveals at least two REITs have had their tax-exempt status revoked by HMRC over the past four years.

Loss of tax-exempt status means that REITs no longer benefit from corporation tax exemptions on property rental business profits, and they may face capital gains tax liabilities on previously exempt property disposals.

Rules governing REITs were relaxed between 2022 to 2024; these include the removal of the stock exchange listing requirement and the simplification of financial reporting requirements.

This has led to a significant increase in REITs entering the tax-exempt regime during this period as the number of new REITs has more than doubled, BCLP said.

BCLP partner Elizabeth Bradley said: “The relaxation of the REIT tax regime has encouraged more eligible investors to set up REITs but care needs to be taken not to fall foul of the regime, as the costs of losing REIT status can be severe.”

“REITs are facing challenges in maintaining their profit-to-financing cost ratios due to higher interest rates and property market volatility.”

Bradley added: “The rise in breaches of the tax regime underscores the value of strong legal and tax advice for REITs navigating an evolving regulatory landscape. Expert advice ensures REITs remain compliant while optimising capital structures, distributions and risk management.”