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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Background: key concepts: property rental business: excluded business: owner-occupied property

Owner occupied property is excluded from the tax exempt property rental business by Schedule 16 FA 2006. A property is ‘owner-occupied’ if it is regarded as such under generally accepted accounting practice. 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 section 107 FA 2006 (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 enterprise. 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’.

Intra-group owner-occupation

This exclusion applies where one member of a group owns a property and rents it out to another member of the group. If the property would be regarded as ‘owner-occupied’ under generally accepted accounting practice in drawing up the group consolidated accounts, the property does not qualify for inclusion in ‘property rental business’.

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. HM Treasury are permitted to introduce regulations to prevent such restructuring (section 136A FA 2006 as introduced by FA 2009).

‘Stapled’ company owner-occupation

This exclusion applies to 06 July 2009 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. If 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’.

The consolidated financial statement of the group would reflect the activities of the stapled company, with the same consequences for what counts ‘owner-occupied’ as are described for intra-group occupation.

‘Stapled’ companies

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.