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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Leaving the regime: overview

 

 

Once a REIT has given notice that it wants the UK-REIT rules to apply, they continue to apply to the company or group until a notice to withdraw from the regime is given either by the REIT (see GREIT06020) or by HMRC (see GREIT06025). If a company or principal company breaches certain of the Company Conditions, application of the UK-REIT rules to the company or group is terminated automatically (see GREIT06030).

 

 

When a company leaves a Group REIT (for example, where a subsidiary is sold), the consequences for the ex-member are the same as for a company that was a member of the group on the day the Group REIT leaves the regime. There is no requirement for that company or the principal company of the group to give a notice under Section 571 CTA 2010. Section 579 CTA 2010 results in the date of leaving the regime being the date on which the company ceases to be a member of the group.

The guidance will refer to (i) a company leaving the REIT regime, (ii) a group REIT leaving or (iii) a member of a group REIT which leaves the REIT regime as “the exiting company”.

No ‘exit charge’ is payable, although the tax treatment of some disposals in the post-cessation period may be affected (see GREIT06015). The requirement to pay distributions net of basic rate tax continues after the REIT has left the regime, until it has paid out all the profits of its property rental business.

There are special rules for when a REIT (or member of a Group REIT) has been within the regime for less than ten years - see GREIT06035.

Date of cessation

The date from which the UK-REIT rules cease to apply depends on what prompted cessation. In general, if the REIT leaves the regime voluntarily, the regime ceases to apply from a date after the company/principal company gives notice. If HMRC gives notice that the regime no longer applies to the REIT company / group (a notice issued to the principal company of a group REIT applies to all the companies in the group), in most cases, the regime will cease to apply from a date before the notice is given. If the termination is automatic, the regime ceases to apply from the end of the accounting period before the breach of condition occurred.

There are exceptions to the general rules for date of cessation when the REIT has been a UK-REIT for less than ten years and the cessation is a result of either an HMRC termination under section 572 CTA 2010 or automatic termination as a result of breaching a Company Condition (section 578 CTA 2010) - see GREIT06035.

Consequences of cessations - overview

On leaving the regime, a line is drawn between the property rental activities of the exiting company after leaving the regime, and those that are carried on and not chargeable to tax while the company is within the regime. All the assets that move out of the property rental business are treated as though they have been sold by the exiting company just before it leaves the regime, and immediately reacquired by the post-cessation business after it leaves.

This sale and reacquisition is deemed to take place at market value but does not give rise to a chargeable gain (or allowable loss). For capital allowance purposes, the transaction is deemed to take place at a value that results in no balancing charges or allowances - and ‘stand-in-shoes’ treatment applies to the ‘new’ owner.

Any losses that may have arisen in the property rental business cannot be carried forward for use against future profits of the post-cessation property business of the company. Losses on residual business activities are however available for use against post-cessation profits in the normal ways.

Losses on disposal of assets of the property rental business cannot be carried forward for use against chargeable gains arising after the exiting company has left the regime. Losses on disposal of residual business assets can be carried forward for use against chargeable gains that accrue after the exiting company has left the regime.

Losses in the early years of the post-cessation property business cannot be carried back and off-set against either profits of the property rental business or profits on other pre-cessation activities.