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HMRC internal manual

Guidance on Real Estate Investment Trusts

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

This page looks at how HMRC will interpret terms used in section 556(3) CTA 2010 the three year development rule).


Development can be either building a property on land owned by the company, additions to existing property or significant refurbishment/ upgrading of a property that goes beyond repairs and renewals. If the expenditure has qualified as a deduction for repair or renewal in the property business, it is unlikely that it would be regarded as ‘development’ for this rule. Guidance on capital/ revenue nature of repairs etc can be found in the Property Income Manual.

30% of the cost

Note that the conditions refer to the development. This means that each development is looked at individually to see if the 30% limit has been breached. The costs should include not just the main contractor costs (site acquisition, construction plant etc) but also all the associated fees and other costs (excluding interest) that are capitalised and included in fixed assets in the accounts. Costs should exclude capitalised interest and any costs/fees for which a deduction is claimed in the property business computation.

For example, company C acquires a property on 1 July 2010 for 1,000 having joined the regime on 1 January 2010. The property is rented out and falls within the property rental business. In May 2011, C completed an extension to the building which cost 350. In September 2013, a further extension costing 250 was added. C sold the property for 2,100 in November 2011.

The first development does exceed the 30% limit, but the disposal is more than three years after its completion. The disposal is within three years of completion of the second development, but for this development, the cost does not exceed 30% of the cost of acquisition.


The 3-year development rule is not intended to apply to developments completed before entry into the REIT regime

Where development work of any more than an insignificant amount is undertaken, it is likely that a certificate of completion will be issued once the building or the extension is ready for occupation or handing over to the tenant to fit out to their own specification. In most circumstances, that certificate will be accepted as marking ‘completion’ of a development for the purposes of section 556(3)(c).

In some circumstances, other markers may be more appropriate, for example where a project is being developed in phases. Depending on the nature of the development and the spacing in time of the phases, completion for each part of the project may be at an earlier date than the certificate of completion of the entire project.