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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Conditions and Tests: Tax-exempt business Conditions: summary

The property rental business of the company must meet two conditions, relating to the number of properties (Tax-exempt business Condition 1 - see GREIT02025) and the relative values of the properties involved in that business (Tax-exempt business Condition 2 - see GREIT02035). These are set out at section 107(3) to (6) FA 2006. They must be met throughout the accounting period of the company.

The company is also required to make a distribution of at least 90% of the (income) profits of its tax-exempt business as measured for tax purposes. Although it is the third Tax-exempt business Condition, it is referred to generally as the distribution condition or requirement. This condition is in section 107(8), and it must be met in respect of each accounting period of the company.

For these conditions, the section 104 definition of ‘property rental business’ is used. For more detail on the definition and exclusions, see GREIT01020 onwards. Note that for UK-REIT purposes, the UK and overseas property businesses of a company are treated as being a single business.

Failing to meet these conditions does not result in automatic removal from the regime, provided the breach is minor. Failure to meet the 90% distribution requirement will result in an additional tax charge on the company. Although no additional tax is chargeable for minor breaches of conditions 1 and 2, repeated breaches will result in removal from the regime (see GREIT07030 and GREIT07045).

Group REITs

For a Group REIT, the property rental businesses of all the members of the group are treated as being a single business (paragraph 6(1) Schedule 17 FA 2006). Tax-exempt business Conditions 1 to 3 must be met by that single business (see GREIT12000 onwards for more detail). The distribution requirement must be met by reference to the ‘UK profits’ of the single business. ‘UK profits’ are the (income) profits of the property rental business of the UK members of the group together with the (income) profits from UK property of non-resident members of the group as measured for tax purposes (see GREIT11045 for more detail).

The same rules about breaching the conditions as described above apply also for the single property rental business carried on by a Group REIT.