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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Property rental income: capital allowances: assets that move between the property rental and residual businesses

A company may decide to change the use of a property from being part of its property rental business to being part of its residual activities or vice versa. A transfer from the property rental business is treated as a disposal by the company’s property rental business and an acquisition by the company’s residual business. A transfer into the property rental business is treated as a disposal by the residual business and an acquisition by the company’s property rental business (sections 555(2) and 557(2) CTA 2010).

The general rule (in sections 555(4) and 557(4) CTA 2010), for either direction of transfer, is that the asset is transferred at tax written-down value for CAA purposes (but note that market value applies for TCGA purposes). Stand-in-shoes treatment applies to the ‘new owner’.

For example, company C may decide to use as its own headquarters offices that were previously rented out to unconnected tenants. Any plant and machinery or fixtures in the property will transfer from being assets of the property rental business to being residual business assets. For CAA purposes, the transfer takes place at a value that gives rise to neither balancing charges nor allowances for the property rental business.

Section 198 and 199 CAA elections

Although the transfer is treated as a disposal, sections 555(4)(a)(ii) and 557(4)(a)(ii) CTA 2010 do not allow section 198 or 199 CAA elections to be made in respect of the transfer.

Transfers of part of an asset

The transfer rules apply also to part disposals of an asset between the property rental and residual businesses, since references to assets are deemed to be references to part of an asset as well for the purposes of UK REIT legislation (section 608(1) CTA 2010).

For example, company C decides to hot-desk administrative staff and can therefore release two floors of its ten storey headquarters for letting to an unconnected tenant. The WDV of the building’s air conditioning is 100. When the two storeys move to the property rental business, they take with them WDV of 20.

Group REITs

These rules apply where the assets transfer from the property rental business of one group member to the residual business of the same group member, or to the residual business of a different group member. They also apply where an asset transfers from the residual business of one group member to the property rental business of the same or of a different group member.