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HMRC internal manual

Guidance on Real Estate Investment Trusts

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HM Revenue & Customs
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Conditions and Tests: Company Conditions: Conditions 4-6

These are the conditions the company must meet throughout every accounting period that it is a UK-REIT. They are set out section 106(6) to (8) FA 2006. If the company fails to meet Conditions 5 or 6 at any time, this results in automatic termination of the regime for the company (section 130 FA 2006). In some circumstances, failure to meet Condition 4 (not a close company) will not result in automatic termination (see GREIT07015 and GREIT07020). See GREIT03010 regarding Condition 4 not being met on the first day.

Company Condition 4 - not a close company

This condition is that the company must not be ‘close’, which broadly means it cannot be controlled by five or fewer participators. A company may not meet the ‘not close’ requirement in Company Condition 4 on the first day of an accounting period (because the company did not meet section 415(1)(b) ICTA i.e. its public shares were not traded within the previous 12 months). Section 109(3) FA 2006 ensures that companies are able to give a section 109 notice in spite of failing to meet the condition on Day 1 (but see GREIT03010 for the contents of the notice). The definition of ‘close’ for this purpose is as set out in section 414 ICTA, with two differences.

One difference is where the company is close only as a result of having a participator who is a limited partnership that is a collective investment scheme. If this is the case, the company can still satisfy this condition. ‘Collective investment scheme’ takes its meaning from section 235 Financial Services and Markets Act 2000. More information on this can be found at CTM48100. A company that is close for this reason is referred to as a ‘cis-based close company’ for loan relationships purposes (see CFM5603c) and the most common example of one is a venture capital limited partnership.

The other difference is where the rules in section 414 (5) and section 415(4)(a) ICTA would allow a company to be ‘not close’ where it is controlled by a company that is not close, or is more than 65% owned by a listed company. In these circumstances the company will be treated as ‘close’ for the purposes of this condition. This effectively prevents a UK-REIT from being a subsidiary of a listed company.

But see GREIT 03010 regarding Condition 4 not being met on the first day in the regime.

Company Condition 5 - classes of shares

This condition limits the types of shares the company may have in issue to two. The company may issue ordinary share capital and non-voting relevant preference shares. The company is further restricted by not being allowed to issue more than one class of ordinary share capital.

‘Ordinary share capital’ takes its meaning as set out in section 832(1) ICTA.

‘Relevant preference share’ takes its meaning from paragraph 1(3) Schedule 18 ICTA or would do so but for the fact that it carries a right of conversion into shares or securities in the company. The shares must be within the normal paragraph 1 Schedule 18 ICTA definition of ‘relevant preference share’, and should either carry no voting rights at general meetings or else only carry rights which are contingent on the non-payment of a dividend and which have not become exercisable up to the date of payment of a dividend. For more detail, see INTM204120.

Company Condition 6 - prohibited types of loan

Company Condition 6 restricts the ways in which the company can borrow money. The company cannot borrow under terms that entitle the lender to interest which depends on the results of the company’s business, the value of the company’s assets or is in excess of market rates or which entitles the recipient to receive an excess return on repayment.

The wording in section 106(8) FA 2006 is similar to the definition of ‘normal commercial loan’ in paragraph 1(5) Schedule 18 ICTA. The main difference is that the section 106(8) definition does not refer to convertible loans, which means that a UK-REIT can issue convertible debt, provided that conversion is into the single class of ordinary share or into relevant preference shares that the company is permitted to issue under Company Condition 5. Section 106(9) FA 2006 provides that a loan will not fall within Company Condition 6 where the interest rate reduces as the company’s business profits increase or where it increases as the company’s business profits decrease. For guidance on interpretation of ‘normal commercial loan’ as defined in Schedule 18 ICTA, see CTM81010.

Group REITs

Company Conditions 4 to 6 must be met by the principal company of a Group REIT (paragraph 5(1) Schedule 17 FA 2006) at the time its notice to join the regime becomes effective and throughout every accounting period the group is within the regime (but as for single companies Condition 4 may not be met on the first day see GREIT03010). The same rules about breaching the conditions as described above apply also for a Group REIT.