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HMRC internal manual

Guidance on Real Estate Investment Trusts

Property rental business income: investment/trading borderline: development

Development for own use

A company may acquire a building or land and develop it with a view to retaining the completed property as part of its investment portfolio. The value of the property as it is being developed will count as involved in the property rental business for the property rental business and Balance of Business Conditions, even though it is yet to generate rental income.

If the property is sold within three years of completion, different rules may apply - see below and GREIT04050.

Three-year development rule

Although there are some references in the UK-REIT legislation to trade and development in section 556 CTA 2010 (section 125 FA 2006), there are no special rules or presumptions for or against trade where the activities are carried on by a UK-REIT. But where the difference is between a non-chargeable gain within the property rental business and a fully taxable trading profit within the residual business, it is less easy to reach agreement than where the choice is between taxation as a chargeable gain and taxation as trading profit.

The rules about development in section 556 CTA 2010 address this by moving the transaction into the taxable environment of the residual business, providing a degree of certainty for companies, but do not determine whether the transaction is trading or investment. This is explained more fully in GREIT04050.

Property held as trading stock

Rental from property held as trading stock (for example, because it is being developed for sale on completion) is one of the classes of income that is excluded from the property rental business by section 604 (CTA 2010. It will still be treated as property income (unless it is temporarily surplus business accommodation, when it might be trading income) but will be part of the taxable activities of the residual business. This exclusion from the property rental business also applies to property held as part of a business of dealing in land.

This exclusion applies even if the properties may be held for many years before resale. If the intention at the outset is to sell, for example as soon as a controlled tenancy falls vacant, then the likelihood is that the activities amount to trade (see BIM60030).