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HMRC internal manual

Guidance on Real Estate Investment Trusts

Background: creating the ring fence


The concept of the ring fence is fundamental to the operation of the UK-REIT regime,and is described in GREIT01015. This page describes how thelegislation puts it in place for single companies. For Group REITs, see GREIT12005.

GREIT01040 lists the definitions of parts of the company byreference to before (C (pre- entry)), during (C (tax-exempt) and C (residual)) and after(C (post-cessation)) the company is in the regime. Section 113(1) and (2) FA 2006 usethese definitions to deem these parts to be carrying on separate businesses and to beseparate companies.

Separate business – section 113(1)

The business of C (tax-exempt) is deemed to be a separate business, distinct from thebusiness carried on by C (pre-entry), C (residual) and C (post-cessation). This deemingdoes not however treat the non-property rental activities carried on by the companybefore, during and after it is in the regime as separate businesses. That is, theactivities of C (pre-entry), C (residual) and C (post-cessation) are not treatedas separate businesses as a result of section 113(1).

Separate companies – section 113(2)

In a similar way, for the purposes of CT, the company so far as it carries ontax-exempt business (i.e. C (tax-exempt)) is deemed to be a separate company, distinctfrom C (pre- entry), C (residual) and C (post-cessation). This deeming does not howevertreat the company so far as it carries on non-property rental activities before, duringand after it is in the regime as separate companies for CT purposes.

Consequences of deeming C (tax-exempt) as a separate business/ separate company

While the company is in the regime, the effect of this deeming is that losses incurredas a result of activities of C (tax-exempt) cannot be offset against profits generated byany other activities carried on by the company (i.e. C (residual)), either in the same ordifferent accounting periods.

The same applies in reverse – losses arising in C (residual) cannot be used to reducethe measure of profits of C (tax-exempt). This may seem an odd activity to prohibit, sincethe profits of C (tax-exempt) are exempt from CT. But the CT measure of those profits isused to determine the minimum distribution requirement, so attempting to reduce theprofits of C (tax-exempt) would reduce that requirement.

This restriction on use of losses applies also to any other deficit, expense or allowancethat might otherwise be available to reduce the measure of profits for CT purposes(section 113(4)). The legislation does not list specific expenses, allowances etc and theterm therefore covers all kinds of items, such as capital allowances, loan relationshipdeficits and excess management expenses.

For the consequences for losses etc when a company joins or leaves the regime, see GREIT03105 and GREIT06010 respectively.