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HMRC internal manual

Guidance on Real Estate Investment Trusts

Background: fundamentals: the ring fence

One fundamental concept underlies the structure of the UK-REIT regime. This is that the activities that qualify for exemption from tax are ring fenced from other activities carried on by other parts of the company or group. The activity that qualifies is holding property to generate a return from rental income, as distinct from building property for sale or trading in property.

Extent of the ring fence: tax-exempt business

To identify activity that qualifies for the ring fence, the legislation uses as the first filter the property business rules.. This limits qualifying activity to the exploitation of land as a source of rent. This means that some types of activity, although related to land, are excluded from the ring fence, for example farming, which is chargeable to tax as a trade under Part 3 CTA 2009.

However, some property business activities are not within the policy objectives of the regime - one of which was to remove distortions in the rental sector, with a focus on bricks and mortar. This results in some types of business that are within a property business being explicitly excluded from the ring fence. For example, rent in respect of way-leaves for oil and gas pipelines are excluded.

‘Owner-occupied’ property is also excluded from the ring fence, because one policy objective is to make the property market more efficient by separating ownership from occupation see GREIT01030.

Nature of the ring fence

The ring fence is a barrier between the tax-exempt activities of the vehicle and any other taxable activities it may carry out. It prevents losses generated in the tax-exempt part of the vehicle being used to reduce profits arising in the taxable part. The basic mechanism for this is the mutual exclusivity of trading and property business , which prevent income or expenses being attributed to the wrong source of income. This is supported by deeming the parts of the vehicle that carry on tax-exempt business to be companies separate from the parts of the companies that carry out the taxable activities of the vehicle, to cater for instances where the non tax-exempt part of the business is also in receipt of income from a property business (such as fees for mobile phone masts).

Property rental business and the ring fence

For single company UK-REITs, the tax-exempt business consists of the activities that fall within the ring fence and is referred to in the legislation as the ‘property rental business’ (see GREIT01020). For Group REITs, the term ‘property rental business’ includes world-wide qualifying property rental activities (that is rental income generated anywhere in the world regardless of the location of the property or the tax residence of the group member which owns it). Whereas the ring fence of tax-exempt activities is limited to the same kind of activities so far as they are carried on by UK resident members of the group, or are UK property rental activities carried on by non-resident subsidiaries (see GREIT11105).