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HMRC internal manual

Guidance on Real Estate Investment Trusts

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HM Revenue & Customs
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Capital gains: transactions within groups: examples (1)

 

 

The examples here and at GREIT05055 illustrate how sections 171, 171A, 135 and 179 TCGA operate where a Group REIT is involved. Indexation is ignored.

 

Facts for examples

A Group REIT consists of principal company P and two subsidiaries, A and B. P carries on most of the group’s property rental business together with some other activities, referred to here as the property rental business and residual business of P, respectively.

P had acquired property X on 1 January 2004 for 800. P transferred property X to the newly incorporated company A on 1 May 2005. At this time the market value of property X was 1,100 and that is the amount P subscribed for the share capital of A. The market value of property X on 1 January 2007 (the date the group joins the regime) was 1,300. A has no other activity apart from renting out property X.

B carries on only residual activities.

The deemed groups are

  • The group as far as it carries on a property rental business, a group consisting of the property rental business of P and the property rental business of A (B has no property rental business activities),
  • The pre-entry group, a group consisting of P, A and B (up to the date the group joined the regime), and
  • The group as far as it carries on residual business, a group consisting of the residual business of P and B (since A has no residual business and B has no property rental business).

For the purposes of sections 171 and 171A TCGA it is only necessary to make a distinction between two groups

  • the group in so far as it carries on property rental business, and
  • the group in so far as it carries on residual business

Situation 1

On 1 May 2007, P started to occupy X as the headquarters of the group, when the market value of X is 1,500. P pays rent to A, as owner of X. The asset ceases to be part of the property rental business of A and transfers to the residual business of A. The group in so far as it carries on residual business now consists of the residual business of P, the residual business of A and B. Put simply, all the property rental business is now conducted by P.

Although A’s ownership of property X has not changed, there is a disposal for tax purposes. Property X has left the property rental business to join the residual business which is a separate group for the purposes of S171 TCGA and therefore an adjustment is necessary.

The immediate effect is that A’s property rental business has disposed of property X to A’s residual business at a market value of 1,500. While the disposal of property X by A is in the course of A’s property rental business and does not create a chargeable gain, there will be a rebasing of A’s interest in property X for the purposes of its residual business which will be the market value of X at the date of transfer (ie 1,500).

In the future, if the shares of A are sold no degrouping charge will arise since A, in so far as it carries on residual business, is treated as a separate company, in a separate group, from A in so far as it carries on property rental business for the purposes of corporation tax (section 541 CTA 2010). As such, A, in so far as it carries on its residual business, has not acquired an asset under s171 TCGA 1992.

Two more situations based on the same facts are considered in GREIT05055.