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HMRC internal manual

Guidance on Real Estate Investment Trusts

Capital gains: computational rules: movement of assets into the property rental business

When an asset that has been used in the residual business of a company changes use to the property rental business, there is a deemed sale by the residual business and reacquisition by the property rental business, (section 557(2) CTA 2010). Any gain or loss crystallised by the deemed sale accrues to the residual business and is chargeable to tax at the main CT rate (small companies rates are not available to UK-REITs - section 535(6) CTA 2010).

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 of part of an asset

Where all or part of an asset is used for a de minimis period for the residual business and then is used wholly for the property rental business there is no chargeable disposal for capital gains purposes (section 535(3) CTA 2010). However, if part of an asset that is used wholly and exclusively for the purposes of the residual business begins to be used wholly and exclusively for the purposes of the property rental 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.

This means that there will be an immediate chargeable gain or loss to the residual business even if a distinct part of what would normally be considered a single asset for chargeable gains purposes was already being used for property rental business activities. The gain arising will be calculated by reference to the market value of the part being transferred and a reasonable apportionment of the cost of the asset as a whole.

As an example: If a property had been used by the company for administration (a residual use) and one third of it is subsequently let to an unconnected party then that third will move to within the property rental business. At that point the transfer of one third of the property to the property rental business takes place at its market value and a chargeable gain will accrue to the residual business of the company.

In calculating the chargeable gain arising to the residual business an appropriate proportion of the base cost of the whole asset needs to be taken into account. The appropriate proportion can be worked out by following the principles in section 42 TCGA.

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).