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HMRC internal manual

Guidance on Real Estate Investment Trusts

Capital gains: transactions within groups: examples (2)



These situations use the same facts as situation 1 in GREIT05050.


Situation 2

The occupation of property X by the group does not proceed, and A finds a new tenant for property X. On 1 July 2008, P sells its shares in A to an unrelated company Q that is not a UK-REIT. The market value of X is 1,700 at the date of sale, and the shares are sold for 1,700.

Under section 171 TCGA, the 1 May 2005 transfer is at no gain/ no loss and the base cost of property X in A’s hands is 800 (the original cost to P).

When the P Group joins the REIT regime on 1 January 2007, and property X is worth 1,300, there is a deemed sale and repurchase of property X at market value, but the gain of 500 is disregarded. A is carrying on a property rental business and therefore is required to pay an Entry Charge of 26 (2% of the market value 1,300 at entry) in respect of property X.

When company A leaves the REIT group on 1 July 2008 there are two deemed disposals:_

The first is a deemed disposal and reacquisition at market value at the time of the intra group transfer under s 179(3) TCGA because A acquired the property from a member of the P group under s 171 TCGA and then A left the P group within 6 years of that intra group transfer. The gain is deemed by s 179(4) TCGA to arise at the beginning of the accounting period when A leaves the REIT group. As an exit from a REIT group crystallises the end of an accounting period for A, the gain will arise while A is still in the REIT group and therefore the gain of 300 (1,100-800) is not taxable.

The second disposal is a deemed disposal and reacquisition of assets involved in the property rental business at market value (section 579(4) and (5) CTA 2010). The gain arising of 400, being the difference between the base cost of 1,300 (market value on joining the regime) and the deemed consideration of 1700 (market value on leaving the regime) is not a chargeable gain (section 535 CTA 2010).

The asset is rebased to market value at the date of entry to the REIT regime to 1,700 and therefore the tax base cost of property X for future disposals is 1,700.

Note that the base cost would not be 1,700 if property X is disposed of in circumstances where section 581(7) CTA 2010 would apply (see GREIT11325) Those circumstances are where a company, that has been a member of a REIT for less than 10 years, disposes of an asset within 2 years of leaving the REIT group. Instead, the asset is deemed to have a value which ignores any uplift for entry to the REIT regime, a transfer from the residual business or a revaluation on exit from the REIT group (section 581 (6) CTA 2010.

The base cost would be calculated as follows:-

If, for example, the company (which leaves the REIT group within 10 years and sold the property within 2 years) had purchased the building or paid for its construction then the tax base cost of the property would be original cost plus enhancement costs and indexation relief.

A company (which leaves a REIT group) had acquired the property from another group member before the group entered the REIT regime and then left the group within 6 years, would be subject to the provisions of section 179(3) TCGA in relation of the value of that property. Using the data above; A would have a base cost in property X of 1,100 (the value at the time of the intra group transfer) plus any subsequent enhancement and indexation relief.

While no chargeable gain arises to A in relation to property X. However, the sale by P of its shareholding in is part of the residual business of P and subject to tax. The gain of 600 (proceeds of 1,700 - base cost of 1,100) on the disposal of those shares is a chargeable gain accruing to (and therefore taxable on) P in respect of its residual business.

Situation 3

As with situation 2 although rather than selling the shares in A for cash, P receives shares in the Q group (but this does not affect its REIT qualifying status).

The analysis in terms of A ceasing to have property rental business and the tax base cost which A holds in property X will be the same as set out in Situation 2 above.

There will be no immediate chargeable gain on the disposal of the A shares. P will be treated as having acquired the shares in Q for the value of the shares originally subscribed for in A that is 1,100.