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HMRC internal manual

Guidance on Real Estate Investment Trusts

Breaches of conditions: overview

To be a UK-REIT, a single company or group must meet a number of conditions. There are also a number of limits that if breached, result in additional tax being charged, but do not result in termination of the regime. Common to all of these (including automatic termination breaches) is a requirement on the company to tell HMRC what has happened as soon as reasonably possible - see GREIT07010. The rules relating to the consequences of breaching the regime’s conditions are set out in regulations (SI 2006/2864).

The regime also has two tests that result in additional tax if the test is failed. The consequences of failure of the Maximum shareholding rule is set out at GREIT02120 and of the Profit: Financing Costs ratio (interest cover test) at GREIT02205.

Automatic termination

Some conditions are absolute requirements, and breaching them results in automatic removal from the regime. These are Company Conditions 1 (UK residence), 2 (not an open-ended investment company), 5 (restrictions on classes of share in issue) and 6 (prohibition of loans linked to business results).

Breach of the other two Company Conditions (not close and shares listed on a recognised stock exchange) may result in automatic termination, but in some circumstances (take-overs, demergers and where the breach was a result of the action of others), the company or group can remain in the regime (see GREIT07015, GREIT07017 and GREIT07025).

Minor breaches

Breaching the 90% distribution requirement may result in a loss of tax to the Exchequer. For this condition, companies will suffer a tax consequence if they do breach it, but may remain in the regime. Similar consequences follow for breaching the interest cover test (see GREIT02205) and for paying a dividend to a corporate shareholder with an interest of 10% or more in the company (Maximum shareholding - see GREIT02120).

For the other conditions of the regime, where there is no immediate loss of tax resulting from the breach, provided the breach is quickly remedied, the company or group can remain in the regime. These are dealt with in more detail at GREIT07030 and GREIT07055.

Multiple breaches

There are limits to how often a company or group can breach most of the individual conditions, and once that limit is exceeded within a ten year period, the regime will no longer apply to the company or group. The number of breaches that are allowed depends on the condition being breached.

There are also limits to occasional breaches of several conditions - again, if the limits are exceeded within a ten year period, the regime will no longer apply to the company or group.

Major or serious breaches

If HMRC thinks that a breach of any of the Tax-exempt business Conditions or the 75/25 tests is serious, they may give notice to the company to remove the company or the group from the UK-REIT regime. This is regardless of whether the limits for breaching any of the individual conditions, or the multiple breach limits have been reached. The consequences of the issue of a termination notice by HMRC are dealt with at GREIT06025.

In this context, it is assumed that HMRC acts reasonably and rationally, and would not take this action unless it had grounds to believe that mischief was afoot. There is right of appeal against the issue of a termination notice.