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HMRC internal manual

Guidance on Real Estate Investment Trusts

Entry to the regime: entry charge: outline

When a company joins the UK-REIT regime, either as a single company or as part of a group, an Entry Charge of 2% of the market value of the properties that transfer into the property rental business is payable (section 538 CTA 2010). The charge is payable by each company joining the regime at the same time as CT on the profits of the first accounting period of the company after it has joined the regime. If the company pays Quarterly Instalment Payments, the Entry Charge should be included in the computations of each instalment for that period.

The mechanism for collecting the Entry Charge is to bring into charge to CT, as income otherwise not charged (section 979 CTA 2009), an amount of notional income calculated in accordance with a given formula. The notional income is treated as arising to the residual business of the company. The income is treated as arising on the day the company enters the regime. No losses, expenses or allowances may be set off against this notional income or the tax arising (section 538(5) CTA 2010). For examples of what this means in practice, see GREIT03028.

If a company chooses, it may elect to meet the Entry Charge in four instalments. For detail, see GREIT03028. However, if after entering the regime a REIT buys shares in a company with a property rental business, it is not possible to elect to pay that entry charge by instalments - see GREIT03028 

Amount of notional income

The amount is 2% of the aggregate market value of properties that are transferred to the property rental business divided by the rate of tax applicable to the company’s profits. The formula given in section 539 CTA 2010section 116(3) FA 2006 is:

Market Value x 2% 

Tax Rate

Market Value

This is the aggregate market value of properties treated as sold and reacquired under section 536 CTA 2010 - see GREIT03020. ‘Market value’ takes its usual TCGA meaning.

A property transferred to the property rental business may be carried at a negative value - there might for example be an onerous lease or an obligation to clean up a contaminated site before sale. In this case, the asset is ignored in calculating the Entry Charge and its negative value is not included in the aggregate.

Tax Rate

This is the rate of tax applicable to the company’s profits that are brought into charge in order to collect the Entry Charge. In most cases, this will be the main CT rate as imposed on the residual business by section 534 CTA 2010. Where a group with non-resident members that have UK property joins the regime, the notional income of the non-resident members will instead be chargeable to income tax (section 539(5) CTA 2010).

Group REITs

The above rules apply to the principal company and any wholly owned subsidiaries at the date the group joins the regime in respect of UK and overseas properties of UK companies and UK properties of non-UK companies. Where a subsidiary is not wholly owned the market value of the properties it owns is reduced to reflect the level of non-group ownership. The entry charge is payable also in respect of the market value of the interest which the REIT has in property rental business assets held via partnerships, unit trusts and joint ventures (see GREIT03030)