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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Capital gains: general

Exemption from tax of gains on disposals of assets used in the property rental business

As well as exempting property rental income from tax, gains made on assets that are used in the property rental business are not chargeable gains (section 535 CTA 2010). If the disposal of an asset of the property rental business results in a loss, that loss will not be an allowable loss (section 8(2) TCGA 1992).

The amount of gain or loss on disposal of an asset of the property rental business is calculated following the normal rules in TCGA, including indexation. Other terms and expressions used in connection with the calculation also take their meaning and interpretation from TCGA given S535 CTA 2010 is “to be read as if it were contained in TCGA 1992 (s 535(9) CTA 2010).

Gains not chargeable are those arising on disposal of assets that have been used wholly and exclusively for the purposes of the property rental business throughout their period of ownership (section 535(2) CTA 2010). There are extensions to this rule to deal with assets that have been used partly or wholly for residual business purposes (see GREIT05010), including a de minimis rule for assets where residual use has been insignificant.

Where an asset moves into or out of the property rental business, there is a deemed sale and reacquisition at market value - see GREIT03020 for more detail.

Taxation of gains on disposal of assets used in the residual business

Gains made on assets used for the residual business of the company are chargeable gains taxable at the main CT rate (small companies rates are not available to UK-REITs) (section 535(6) CTA 2010).

Part of an asset used wholly and exclusively for one class of business

If part of an asset is sold and that part had been used wholly and exclusively for the property rental business, then the gain arising on that part will not be a chargeable gain. This applies whether the part retained is used for the property rental or the residual business of the company. This is because section 608 CTA 2010 treats references to ‘asset’ in the UK-REIT rules to include reference to part of an asset.

This means that part disposals by a single company REIT, or by a company forming part of a Group REIT, where a gain on disposal would not be a chargeable gain need not follow the usual section 42 TCGA rule. The capital gains cost of the asset sold should be calculated by reference to a reasonable apportionment of the cost of the larger asset.

Application of TCGA rules to UK-REITs

Apart from the part-asset treatment described above, normal TCGA rules apply to computing the quantum and timing of gains arising on disposal of assets used in both the property rental and residual activities of a UK-REIT. For example, where ‘market value’ is used in sections 555-557 CTA 2010, the phrase takes its meaning from section 272 TCGA, as the price which an asset might reasonably be expected to fetch on a sale in the open market (section 609 CTA 2010).

There are some differences where assets have had mixed use prior to disposal (see GREIT05010), in the application of section 171 TCGA (transfers within a group) for single company UK-REITs that have 75% subsidiaries (see GREIT09100) and, for Group REITs, sections 171 and 171A TCGA (actual or notional transfers of assets within a group) and sections 179A and 179B TCGA (reallocation or roll-over of gains within a group).

Although not affecting the capital gains of the UK-REIT itself, UK-REIT shares are added to the list of investments covered by the special rule in section 212(1) TCGA (annual deemed disposals of holdings of certain assets) for the long term funds of insurance companies (see GREIT09025).