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HMRC internal manual

Guidance on Real Estate Investment Trusts

Entry to the regime: effects of entry: cessation of business and accounting period

On joining the regime, a line is drawn between the property rental activities of the REIT before entering the regime (pre-entry company/group as set out in section 607 CTA 2010 (formerly section 113 FA 2006 and para 2 sch 17 FA 2006)), and those that are carried on and exempt from tax while the REIT is within the regime. This is done in two ways: one is to deem the pre-REIT property business of the company to cease for tax purposes; the other is to cause the accounting period of a REIT company or a company member of a REIT group to come to an end for CT purposes on joining the regime.

Cessation of pre-REIT property business

At entry, the UK and overseas property businesses of UK companies and the UK property businesses of non-UK companies are treated as ceasing (section 536 CTA 2010). The property business carried on by the REIT once it has joined the regime is therefore a newly set up and commenced business for tax purposes. Section 519 CTA 2010 defines a property rental business for the purposes of the REIT legislation. This deemed cessation does not however apply to the other activities carried on by the company which are defined in section 522 CTA 2010 as the residual business. When a company/principal company leaves the REIT regime the activities are referred to as the business of the post cessation company/group as in section 607 CTA 2010.

Effect of cessation on losses

Losses etc relating to the property businesses pre-entry cannot be carried forward for use in working out the profits of the property rental business. Neither can losses arising in the first accounting period of a property rental business be carried back to reduce profits of accounting periods before it joined the regime.

To the extent that the company carried on activities other than property rental, these are regarded as a business that carries on uninterrupted, before, during and after the company is in the regime. If the company had a trading loss in the final accounting period before it joins the regime, that loss can be carried forward in the normal way and used against profits of the trade as carried on by the residual business of the company after the company has joined the regime - see GREIT03105.

If the company has unused capital losses, even if they arose on pre-entry disposals of rental property, they can be carried forward and used to reduce chargeable gains that may arise to the residual company/group or the post cessation company/group. See GREIT03100.

One accounting period ends/ new one begins - section 536(5) CTA 2010

When a single company or a member of a group joins the REIT regime, an accounting period of that company comes to an end. This is the final accounting period for that pre-entry company. A new accounting period starts on the first day the REIT regime applies to the company. This is the first accounting period of that company’s property rental business and its residual business. This requirement applies for UK members of a group joining the REIT regime and for non-UK members carrying on a UK property rental business.

Note that ‘accounting period’ is a term used for computing profits and assessing CT, and is defined in sections 9 and 10 CTA 2009. It is not necessarily the same period as the interval between two accounting dates. Although an ‘accounting period’ always comes to an end on an accounting date, there are several occasions when a new accounting period starts between two accounting dates. The requirement for a new accounting period to begin applies only for CT purposes: there is no requirement that the company changes the date to which it draws up its accounts to reflect the new accounting period for CT purposes.

Corporation Tax returns

When a company in the REIT regime will not have taxable income HMRC will not issue a Corporation Tax reference for the company so no return will be submitted by the REIT. If a company requires a tax reference (for example for a section 198 CAA 2001 election on a third party sale) it can request one. When a reference has been issued Notices to deliver Corporation tax returns will not be issued unless requested. If there are residual companies that can be made dormant, this can be done by request. If any liability subsequently arises the company has an obligation to notify chargeability under Paragraph 2 of Schedule 18 FA 1998 and returns will subsequently be required.

For the avoidance of doubt property rental profits should n o t be reported in a residual company’s tax return, Box 169 of the CT600 tax return (Ring fence profits) does not refer to REITs and should be left blank