IFM21030 - Real Estate Investment Trust : Background: Key Concepts: Property Rental Business: Excluded Business: Owner-Occupied Property

Owner occupied property is excluded from the tax exempt property rental business by CTA 2010/S604. A property is ‘owner-occupied’ if it is regarded as such under generally accepted accounting practice.

For groups, property recognised as owner-occupied in accordance with generally accepted accounting practice in the consolidated accounts is owner-occupied for the purposes of CTA2010/S604.

Specific legislation has been introduced to prevent a REIT restructuring its group to benefit from exemption from tax on rental income from a person (the term person includes a company) which is connected to but is not a member of its REIT group. The Real Estate Investment Trusts (Prescribed Arrangements) Regulations 2009 (SI2009/3315) were introduced using the HM Treasury power at CTA2010/S600 to introduce regulations to prevent such restructuring. (see IFM29400).

Note that ‘owner-occupied’ property does not count as property involved in the tax-exempt business for the purposes of the first two property conditions in CTA 2010/S529 (to be tax-exempt, the business must involve at least three properties and no one property involved in the business can be worth more than 40% of the total value).

Meaning of ‘owner-occupied’

IAS 40 defines ‘owner-occupied’ as property held by the owner for use in the production or supply of goods or services or for administrative purposes. In presenting the consolidated financial statements of a group, the activities of the group members are presented as being those of a single economic entity. This means that a property owned by one group member and rented out to another would be regarded as ‘owner-occupied’ if the other group member used it for the production of goods, administration etc. If the other group member in turn rented out the property to an unconnected tenant, then it would not be regarded as ‘owner-occupied’.

‘Stapled’ company owner-occupation

Shares of one company are ‘stapled’ to shares of the other if the shares of the two companies are in practice always traded together. That is, shares in company A are stapled to shares in company B if a person buying or selling a share in company A has to buy or sell shares in company B. Dealing in them both at the same time need not be obligatory; it can simply be advantageous because of the nature of rights attaching to one or other share.

Where a property is owned by a member of a group and is let out to a company whose shares are ‘stapled’ to those of a member of the group and the property would be regarded as ‘owner-occupied’ under generally accepted accounting practice, taking the group and the stapled company together, the property does not qualify for inclusion in ‘property rental business’.

As the consolidated financial statement of the group reflects the activities of the stapled company, the consequences for what counts as ‘owner-occupied’ are the same.

If company SC is ‘stapled’ to a member of the group, GM1, then SC and GM1 are treated as a single company for these tests. This means that a property owned by GM1 that is rented out to SC is treated as ‘owner-occupied’ and is not part of the property rental business of the group.

If another group member, GM2, rented property to SC, it too would be excluded from the group’s property rental business. This is a consequence of the requirement to treat the property rental businesses of all the group members as a single business, combined with this stapled company rule.