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HMRC internal manual

Guidance on Real Estate Investment Trusts

Property rental business income: investment/trading borderline: 3 year development rule



If a UK-REIT develops a property with the intention of retaining it as part of the portfolio, but sells it within three years of completion, the disposal is taken out of the property rental business and any gain, loss or profit arises to the residual business. This rule only applies in respect of developments completed after entering the UK-REIT regime. Simply transferring the property from one member of a Group REIT to another would not trigger this rule.


The rule does not say that the disposal is automatically to be taxable as a trading transaction. The transaction moves to the residual business where the normal rules apply to decide if the disposal is by way of trade or capital in nature.

If the property was owned when the company joined the regime, the deemed sale and reacquisition at entry are ignored. The cost of acquisition will therefore be the original cost of the property to the company, as enhanced by any subsequent capital expenditure. As well as the property reverting to its original cost, the company can claim repayment of any Entry Charge paid in respect of the property (see GREIT04055).


The rule in section 556(3) CTA 2010 applies if:

  • the property has been developed since acquisition
  • the cost of the development exceeds 30% of the fair value of the property at the later of the date the company acquired the property and the date the company joined the regime, and
  • the company disposes of it within three years of completion of the development.

Section 556 CTA 2010 does not apply to developments completed before entry into the REIT regime. ‘Fair value’ is to be determined in accordance with international accounting standards (see GREIT02040). None of the other terms have any specific definition for the purposes of this rule. Broad descriptions of how HMRC will interpret them in applying this rule are set out in GREIT04060.


Company C acquired property P on 1 July 2005 for 800, which it rents out for 50 per year net of expenses. C enters the UK-REIT regime on 1 January 2007, the market value (and fair value) of P is 1,000, and the market value of the rest of the property rental business properties is 9,000. The residual business of C pays the Entry Charge of 200 in a lump sum along with CT due for accounting period ending 31 December 2007.

In May 2008, the company completes an extension to the building, which cost 350. A too-good to miss offer is made and C sells the property for 2,500 in November 2010.

The developed property is sold within three years of completion of the development, and the cost of development exceeds 30% of the fair value of the property at entry to the regime. The disposal therefore moves to C’s residual business. In the circumstances, this would probably be regarded as capital and not a trading transaction.

The gain before indexation of is 1,350 = 2,500 - (800 + 350) (deemed sale and reacquisition at 1 January 2007 is ignored). The gain accrues to and is taxable as part of C‘s residual business. C can also claim repayment (1,000/10,000) x 200, being the proportion of the Entry Charge relating to property P which has moved into and then been sold from C’s residual business.

Note that although the deemed sale and reacquisition on entry to the REIT regime is ignored, no adjustment is made to the profits of the property rental business for the period 1 January 2007 to November 2010 to reflect the 50 annual rent.