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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Capital gains: computational rules: movement of assets out of the property rental business

 

 

When an asset that has been used in the property rental business changes use to residual business, there is a deemed sale by the property rental business and reacquisition by the residual business, (section 555(2) CTA 2010). Any gain or loss crystallised by the deemed sale accrues to the property rental business, and is therefore not a chargeable gain or allowable loss.

 

The deemed sale and reacquisition take place at market value, where market value takes its normal section 272 TCGA meaning as the price which an asset might reasonably be expected to fetch on a sale in the open market (section 609 CTA 2010) (this is different from the sale proceeds for capital allowances purposes - there, the tax written-down value is used - see GREIT04015). This market value is the base cost for TCGA purposes for the asset for any future disposal.

Movement out of the property rental business as a result of a disposal by way of trade

If the asset is transferred out of the property rental business because it is being sold by way of trade then, for the purposes of TCGA, the asset is treated as though it had been disposed of in the course of the company’s residual business and the deemed disposal and reacquisition at entry is ignored (section 556(2) CTA 2010) - see GREIT04515.

Movement out of property rental business as a result of the 3 year development rule

If a property involved in the property rental business has been developed and the cost of the development exceeds 30% of the fair value of the property on entry into the regime or acquisition (whichever is later) and the property is sold within three years of completion of the development, similar rules apply to treat the property as if it had been disposed of in the course of the company’s residual business and the deemed disposal and reacquisition at entry is ignored (section 556(3) CTA 2010) - see GREIT04520.

Movement of part of an asset

If part of an asset that is used wholly and exclusively for the purposes of the property rental business begins to be used wholly and exclusively for the purposes of the residual business, the gain or loss is treated in the same way as if an entire asset had been transferred. This is because section 608(1) CTA 2010 treats references to an asset in the UK-REIT rules to include reference to part of an asset.

For this reason, there will be an immediate adjustment even if a distinct part of the overall asset is already used for residual activities. A calculation is required as follows:

  1. Obtain the market value of the part of the asset transferred at the time of transfer.
  2. Calculate the gain on that part asset. (If the asset has a single base cost the appropriate proportion to use in this calculation can be obtained by following the principles at section 42 TCGA.) Although the gain is not a chargeable gain, it still has to be computed because the amount will feature at some stage in the attribution of distributions to property rental and residual activities (see GREIT08010).
  3. The market value obtained at step one will be the base cost for TCGA purposes of that part of the asset going forward.

Single (undivided) asset in mixed use

Where an asset is in mixed use but it is not possible to identify separate parts as relating to the property rental and residual activities, then an apportionment of the gain will be needed when it is disposed of by the company (section 535(5) CTA 2010) - see GREIT05010).