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HMRC internal manual

Guidance on Real Estate Investment Trusts

Property rental income: general



The starting point for computing the profits of the property rental business that are not chargeable to tax for a REIT company is that a tax computation of property rental business income is made using the normal property income rules for rental profits from UK property of a company, as set out in section 210 CTA 2009 (section 599(2) CTA 2010. Detailed guidance on property business rules can be found in the Property Income Manual (PIM). The rental income is then adjusted for finance costs (see below). For a REIT group the rentals net of interest for each company are aggregated in the financial statements.


Capital allowances

Capital allowances are deductions in arriving at profits of a property business, and this rule is followed in calculating the profits of the property rental business. But the rules which allow a company to claim less than the full amount available are set aside - see GREIT04010 for the extent to which these are deducted.

Financing costs

Financing costs and other debits and credits arising from loan relationships and derivative contracts are in general excluded from the calculation of profits for property business purposes. Instead, an aggregate profit on non-trading loan relationships or derivative contracts is charged under section 299 CTA 2009, while an aggregate deficit (a non-trading loan relationship deficit) can be set against other profits of the period, or relieved in other ways.

However, in calculating the profits of the property rental business, debits and credits arising from loan relationships, embedded derivative contracts and certain hedging relationships, where in each case they have been entered into for the purposes of the property rental business, are included - see GREIT04020 to GREIT04025.

Overseas property

Profits from overseas property (see sections 204 and 206 CTA 2009) are part of the property rental business for these purposes where the overseas property is owned by a UK tax resident company.

Dual purpose income and expenses

Where an item of income or expenditure relates partly to the property rental business and partly to residual business, the amount should be apportioned between the two on a just and reasonable basis (section 599(7) CTA 2009).

Disposals by way of trade of property rental business property

Although the majority of disposals of assets used in the property rental business will be capital, there are circumstances when the disposal may amount to trade or adventure in the nature of trade (see GREIT04040 onwards for background on the investment/trading borderline). As the profits of the property rental business that are not chargeable to tax are restricted to property income and capital gains arising from the property rental business, where this happens, the asset must leave the property rental business. The disposal is then part of the trading activities of the residual business.

For the purposes of the disposal, the property is treated as though it had never been within the property rental business (see GREIT04050 for details of how this is achieved) and the company can reclaim any Entry Charge attributable to the property. However, the exclusion from the property rental business does not extend to the rent and associated expenses that arose before the sale, which remain part of the calculation of the profits of the property rental business in the accounting periods up to the date of sale.

Group REITs

The rules outlined above and explained in more detail in GREIT04010 onwards also apply to calculating the profits of the property rental business of each member of a Group REIT that carries on property rental business.