IFM27060 - Real Estate Investment Trust : Breaches of conditions: Balance of business Conditions: repeat, multiple and serious breaches: CTA2010/S576 and S577

Breach lasting three accounting periods

If the income or assets of the property rental business are below 75% but above 50% of the total in three or more consecutive accounting periods, HMRC may give notice to the company (principal company in the case of Group REIT) to remove the company or the group from the UK-REIT regime (CTA2010/S576(1)).  The company or group will cease to be a UK-REIT with effect from the last day of the second accounting period (CTA2010/S572(4)). 

Repeat and multiple breaches

If either of the balance of business conditions (taken individually) are breached more than twice in ten years, HMRC may issue a notice to terminate the regime with effect from the last day of the accounting period before the condition was breached for the third time (CTA2010/S576(2)). 

A breach of either of the balance of business conditions is also included in the count of breaches for the purposes of CTA2010/S577 which deals with multiple breaches of chapter 2 conditions (see IFM27065).  However a breach of the balance of business asset condition when first joining the REIT regime will not be taken into account when reckoning the number of breaches see IFM22075.

Serious breaches

Where the breach of a balance of business condition is serious, HMRC may give notice that the regime no longer applies (CTA2010/S572 and S574), regardless of whether the limits for breaching either of the individual conditions, or the multiple breach limits have been reached.  In determining whether a breach of the balance of business conditions is serious HMRC will take into account all the circumstances giving rise to the breach including, in particular, any adverse effects of the current economic climate. The notice specifies the date from which the regime ceases to apply, which in general is from the end of the accounting period before the one in which the breach occurred.  For more detail on termination notices under CTA2010/S572, see IFM26025).

Income or assets of property rental business below 50% of total

If the income or assets of the property rental business fall below 50% of the total regardless of the duration, the breach is regarded as serious and HMRC may issue a termination notice under CTA2010/S572.  The company or group will then cease to be a UK-REIT with effect from the end of the accounting period before that in which the percentage falls below 50%.