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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Entry to the regime: effects of entry: deemed sale and reacquisition of assets

When a company / member of a group joins the REIT regime the property rental business of that company is treated as ceasing on the day before it joins. The assets that were involved in the company’s pre-entry property rental business are treated as though they had been disposed of and reacquired immediately after entry to the regime by the company’s property rental business (section 536(2) CTA 2010 ). Group members that do not carry on property rental business are not affected by these rules

Asset involved in the property rental business

For the purposes of the deemed sale and reacquisition an asset is involved in the property if it would be a property involved in the property rental business condition in section 529(4) CTA 2010 - see GREIT02020.

This means that the only assets that are sold and reacquired are those that are an estate, interest or right by the exploitation of which the property rental business is conducted. It also means that the same definition of ‘property rental business’ (see GREIT01020) applies before and after a company joins the REIT regime. In other words, the assets that are deemed to be sold and reacquired are only those UK and overseas properties that will be involved in the property rental business of the REIT company once the regime applies. As a result, overseas properties of non-UK group companies are not treated as sold and reacquired.

Sales and purchases close to the date of entry

Where the purchase is being made under an unconditional contract, the property will be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 109 notice.

Where a sale is being made under an unconditional contract, the property will not be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 109 notice.

For sales and purchases, the later date when the property is conveyed or transferred to the purchaser is not relevant.

If the contract is conditional, the date of acquisition or disposal is the date all of the conditions are satisfied. For more detail on conditional contracts, see CG14261 

Capital Gains

The deemed disposal of assets takes place at market value, which takes the same meaning as it does for the purposes of TCGA (section 609 CTA 2010). This is the price that the assets might reasonably be expected to fetch on a sale in the open market with a willing buyer and seller negotiating on the basis of full information (see CG16330).

If the deemed sale and reacquisition would result in a gain for a company which is joining the REIT regime, this is not a chargeable gain for TCGA purposes (section 536(4) CTA 2010). If the result is a loss, that loss is not allowable for TCGA purposes.

A Company / principal company of a group that joins the regime has to be listed on a recognised stock exchange. UK listed companies will be following RICS (Royal Institute of Chartered Surveyors) guidelines in valuing the properties on their books, and valuations will therefore be professional and recent. As a rule of thumb, values shown in the published accounts should be a reliable starting point for determining market value for this purpose. For guidance on valuing property, see CG74000 onwards.

For interactions of commencement provisions and capital gains claims and elections that can be made, see GREIT03100.

Capital allowances

For capital allowance purposes, the transfer takes place at tax written-down value such that no balancing charges or allowances arise to the company which joins the REIT regime. The effect of this is that the company’s property rental business in the regime takes over the capital allowance position of the company’s property rental business before joining the regime.

For interactions of commencement provisions and capital allowances claims and elections that can be made, see GREIT03105.

Note that although the company’s property rental business will not be liable to CT on the profits of its property rental business it must calculate a ‘shadow’ capital allowance claim in order to determine the amount of profits which it must distribute (see GREIT04010 for details).

Group REITs

Where a subsidiary is not wholly owned, a percentage of assets is ignored when determining the assets sold and reacquired, to reflect the level of non-group ownership.