The new vehicles would be allowed to invest in any type of property--including hotels, golf courses, prisons or infrastructure--as well as conventional commercial property anywhere in the world. REITs would also be permitted to develop, despite initial concerns of civil servants and ministers that this could put retail investors at risk from speculative development. In addition, the new REITs will not be forced to include an element of residential property--another suggestion that had been on the table.

The Treasury also said on Wednesday that companies would be able to run both internal and external REIT funds. This opens the way for most listed UK property companies, and some private groups and institutional funds, to turn themselves into REITs. But there are still a number of outstanding issues to be resolved. Most importantly, there is the question of how companies will be taxed when they convert. This could either involve a levy on outstanding capital gains tax or on total assets--or a hybrid of the two with property analysts suggesting a windfall payment of more than £1 billion.

The other outstanding question is whether the government will restrict REITs' borrowings because these could be used to shield them from paying tax. "The level of borrowing within a UK-REIT would have a direct impact on the overall tax position," the Treasury paper said.

Under the proposals, REITs would have to have 75% of their income coming from relatively safe activities such as rent on buildings. The other 25% would include development and facilities management. They would have to distribute up to 95% of income--after deductions and capital allowances--to shareholders. In return, no corporation tax would be paid.

The reform is still on track to be introduced in the Finance Bill of summer 2006, as expected. However, civil servants will spend the rest of this year fine-tuning their model to ensure that the property industry does not use UK-REITs as a tax-avoidance measure. "The government remains committed to the introduction of a UK-REIT...while imposing no overall cost to the Exchequer," the Treasury paper said. The government department plans to set up a working group on the subject and ministers will report back on its progress later this year.