IFM24045 - Real Estate Investment Trust : Property rental business income: investment/trading borderline: development

Development for own use

A company may acquire a building or land to develop it with a view to retaining the completed property as part of its investment portfolio. The value of the property as it is being developed will count as assets involved in the property rental business for the property rental business and Balance of Business Conditions, even though it is yet to generate rental income. 

If a property which was developed for the purposes of letting within the property rental business is sold within three years of completion of its construction, it may lose its status as a property rental business investment asset. Different rules may apply – see below and IFM24050.  

Three-year development rule

Although there are some references in the UK-REIT legislation to trade and development in CTA2010/S556, there are no special rules or presumptions for or against trade where the activities are carried on by a UK-REIT. But where transactions could result in a gain within the property rental business or a trading profit within the residual business the tax consequences are significantly different.

The legislation about development in CTA2010/S556 addresses this by moving certain transactions into the taxable environment of the residual business. This provides certainty for companies disposing of property within 3 years of development. However the rule does not determine whether the transaction is trading or investment or provide the treatment of transactions falling outside the 3-year period. This is explained more fully in IFM24050.

Property held as trading stock

Rental from property held as trading stock (for example, because it is being developed for sale on completion) is one of the classes of income that is excluded from the property rental business by CTA2010/S604. It will still be treated as property income (unless it is temporarily surplus business accommodation, when it might be trading income) but will be part of the taxable activities of the residual business. This exclusion from the property rental business also applies to property held as part of a business of dealing in land. 

This exclusion applies even if the properties are intended to be held for many years before resale. If the intention at the outset is to sell, for example as soon as a controlled tenancy falls vacant, then the likelihood is that the activities amount to trade (see BIM60030).