How REITs and their distributions are taxed

A real estate investment trust, or REIT, is a company that owns and rents out property, and it is taxed in a way that is unusual among UK shares. The company itself does not have to pay corporation tax on the profits from its rental business, and it does not pay capital gains tax on the properties it invests in¹. In exchange, it must distribute 90% of the profits it makes from its rental business to its shareholders¹.

The consequence for an investor is the part that catches people out. Because the company has not already paid tax on those profits, the tax is collected from the shareholder instead. Shareholders in REITs pay income tax, as opposed to dividend tax, on the distributions that are made to them². The payout is not a dividend for tax purposes, even though it arrives in your account looking much like one.

That single difference changes which allowance applies, which rates apply, and what you have to report. Hold the same shares inside an ISA or a SIPP and none of it arises: no tax is paid on the distributions if REIT shares are held in an account such as an ISA or a SIPP¹.

REITs pay no corporation tax on rental profits

The starting point for the whole tax treatment is the exemption at company level. REITs do not have to pay corporation tax on profits from the rental business¹. The exemption extends to capital gains: REITs do not pay any corporation or capital gains tax on their property investments⁵.

That is a deliberate trade. A REIT gives up the tax shelter a normal company enjoys on its profits, and in return it accepts a distribution rule that pushes those profits out to investors. A REIT must distribute at least 90% of its net rental income as property income distributions⁶. The AIC puts the same requirement in slightly different words: a REIT has to distribute 90% of the profits it makes from its rental business to its shareholders¹. Standard Life describes it as paying out 90% of property rental income to shareholders as dividends⁸, and Hargreaves Lansdown says REITs must also distribute 90% of their property rental income to investors⁹.

The practical effect is that very little profit is retained and taxed inside the company. Almost all of it reaches the shareholder, and that is where the tax falls due. It also means the income you receive is not a distribution of profits that have already borne corporation tax, which is precisely why it is not treated as a dividend.

For comparison, an ordinary landlord who incorporates pays corporation tax on profits instead of income tax on rental income¹⁰. A REIT is the opposite arrangement: no corporation tax at company level, and income tax in the hands of the investor.

Distributions are taxed as income, not as dividends

The rule that matters most to a REIT investor is short. Shareholders in REITs pay income tax, as opposed to dividend tax, on the distributions that are made to them in this way². Interactive Investor states it the same way: shareholders in REITs pay income tax rather than dividend tax on distributions⁶.

Income tax and dividend tax are not the same regime, and the difference is not cosmetic. Dividend income has its own rates and its own nil rate band. Income that is not dividend income is taxed at the rates that apply to the rest of your income, added on top of your salary, pension or other earnings, and taxed at whatever rate that pushes you into. Tax on savings interest works on the same principle: you pay tax on any interest over your allowance at your usual rate of Income Tax¹¹.

Two features of the income tax system are worth knowing because they shape how a REIT payout is treated in the calculation. First, there is an ordering rule: if a person has dividend income but no savings income, the dividend income is treated as the highest part of the person's total income¹². Second, the personal allowance is being reordered from April 2027, when it will be deducted from employment income, trading income or pension income first, without changing how the dividend allowance, personal savings allowance or property allowance may be used¹³.

One thing that does not apply is National Insurance. Dividend shares in an employee share plan are not subject to National Insurance contributions¹⁴, and REIT distributions are investment income rather than earnings from employment, so the National Insurance that comes out of a salary is not part of the picture.

Holding REITs in an ISA or pension: no tax on distributions

The simplest way to remove the question entirely is to hold the shares in a tax wrapper. If REIT shares are held in an account such as an ISA or a SIPP, no tax is paid on the distributions¹. The AIC makes the same point twice, noting that this makes REITs a tax-efficient holding in those accounts¹.

The wrapper rules are broad. You pay no income or capital gains tax on the investments you hold in an ISA, and you do not have to declare the ISA on your tax return⁵. For ISAs generally, you will not pay tax on the interest or the financial return on that account¹⁵. On the capital side, individuals do not pay tax on capital gains arising on their disposals of ISA investments¹⁶.

Pensions work on a different model but reach a similar place for the income. Private pension saving incurs income tax on an "exempt, exempt, taxed" model¹⁷. In plain terms, contributions get relief, the fund grows free of tax, and withdrawals are taxed as income when they are taken. A REIT held inside a SIPP therefore pays out without tax being deducted at the point of distribution.

There is one narrow exception worth knowing about, and it concerns cash rather than shares. Where interest or an alternative finance return is earned on cash deposits held in a stocks and shares component or an innovative finance component of an ISA, no relief from tax applies to that interest, and the account manager must pay a flat rate charge to the Board at the savings basic rate in force for the year¹⁸. That is a charge on the ISA manager for cash held within the wrapper, not a tax on the investor's REIT distributions.

How REIT distributions are taxed outside a tax wrapper

In a general investment account, the distributions are taxable income in the year they are received. The rate is your usual rate of Income Tax, applied to the income on top of everything else you earn¹¹. There is no separate REIT rate and no special band.

The dividend nil rate, often called the dividend allowance, does not cover them. The allowance is not really an allowance at all: it is a 0% tax rate inserted into ITA07/S8, as S8 (A1), properly called the dividend nil rate⁷. It applies to dividend income. Where a general investment account holds ordinary dividend-paying shares, any dividends you receive that exceed your annual dividend allowance are subject to income tax¹⁹. A REIT distribution is not dividend income, so it does not use up that nil rate and does not benefit from it.

If you sell the shares at a profit, a separate tax applies to the gain. How you report and pay Capital Gains Tax depends on what you sold, and the rules differ for a residential property in the UK²⁰. For non-UK residents with UK income, the position is that you do not normally pay tax when you sell an asset, apart from on UK property or land²¹. Where a property was used partly for business, relief can be restricted: you may still owe tax if you used part of it for business only²².

Two further points matter for anyone with income outside a wrapper. Renting out property counts as taxable income and can affect benefit payments²³, and the same principle applies to investment income when means-tested benefits are assessed. And if you are a Scottish taxpayer, the rates on earned income differ, but you will pay the same tax as the rest of the UK on dividends and savings interest²⁴.

Why a REIT distribution is taxed differently from a normal share dividend

The difference comes from where the tax is paid, not from what the investor receives. A normal company pays corporation tax on its profits and then decides what dividend to pay out of what is left. The shareholder receives a dividend, and the dividend rules apply to it.

A REIT does not pay corporation tax on the profits from the rental business¹. Nothing has been taxed at company level, so the tax has to be collected somewhere, and it is collected from the shareholder as income tax on the distribution². The 90% distribution requirement is what makes that work: it ensures the untaxed profit reaches investors rather than sitting in the company¹.

The dividend rates themselves are set out in the same legislation. Dividend income which would otherwise be chargeable at the basic rate is chargeable at the dividend ordinary rate⁷. That rate structure applies to dividends, which is why the distinction between a dividend and a REIT distribution has consequences for the arithmetic.

There is a parallel in another part of the tax system that shows the same logic at work. Gains on investment bonds come under income tax rules, not capital gains tax rules²⁵. In both cases, the label on the product does not determine the tax; the underlying structure does.

Is REIT income taxed at the same rate as my salary?

It is taxed under the same system, but it is not the same kind of income. REIT distributions are added to your total income for the year and taxed at the rate that applies to you, in the same way that savings interest over your allowance is taxed at your usual rate of Income Tax¹¹. They are not earnings from employment, so no National Insurance is due on them.

The comparison with salary is useful for one reason: it shows how a REIT payout can push you into a higher band. Because the income stacks on top of your earnings, a distribution can move part of your income from one rate to another. The same effect appears elsewhere in the tax system. Any portion of redundancy pay above £30,000 is treated as income and taxed at the same rate as your salary and other earnings²⁵. The principle is that income is income once it is added together.

Scottish taxpayers should note the split. Scottish Income Tax sets different rates and bands on earned income, but you will pay the same tax as the rest of the UK on dividends and savings interest²⁴. A REIT distribution is not dividend income, so the treatment of dividends and savings interest in Scotland is the closest published comparison, and it confirms that this part of the tax system is not devolved.

Where the rules do differ across the UK, it tends to be in property taxes rather than income tax. Land and Buildings Transaction Tax in Scotland has different rates and bands for different types of properties, with separate rates for residential properties and residential property with the Additional Dwelling Supplement²⁶, and interests in moveable property such as kitchen white goods or furniture fall outside the scope of LBTT²⁷. In Wales, Multiple Dwellings Relief is not available for some transactions involving leasehold interests, transactions where the subsidiary dwelling exception means the main rates of Land Transaction Tax apply, and transactions involving halls of residence for students in further or higher education²⁸. These affect property transactions, not the tax on a REIT distribution.

Where the protection and the paperwork sit

The tax treatment of a REIT distribution is a matter of law, not of the provider's discretion, so there is nothing for a firm to get wrong in the way it labels a payout. What can go wrong is the reporting. Income received outside a wrapper has to be accounted for, and the tax is collected through self assessment where it is not already dealt with through PAYE.

If a dispute arises with an ISA provider about the account itself, the Financial Ombudsman Service can look at complaints about individual savings accounts¹⁵. The ombudsman's role is to resolve complaints about the service, not to recalculate a tax liability, which remains a matter between the investor and HMRC.

For free, impartial guidance on how the income tax system treats different kinds of investment income, MoneyHelper and the tax charities are the places to start. For the calculation of your own liability, HMRC's guidance and self assessment are the route.