Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
, see all updates

Breaches of conditions: Company Conditions 3 and 4 (listing requirement and 'not close'): take-overs

The general rule for breach of Company Conditions 3 and 4 (shares listed on a recognised stock exchange and ‘not close’) is automatic termination, where the conditions are breached in the same accounting period, the termination takes effect from the end of the previous accounting period (Regulations 3 & 4 SI 2006/2864).

However, if the company or group has been taken over by another UK-REIT, it can remain in the regime despite breaching either of these conditions.

Where the target company or group is subject to a take-over bid, the shares of the target company (principal company in the case of a Group REIT) will stop being listed on a recognised stock exchange as soon as the bid becomes final. The target would therefore fail Company Condition 3 at that date, and the regime would normally cease to apply with effect from the end of the previous accounting period.

It is likely that the target company (principal company in the case of a Group REIT) would become a close company as that term applies for the purposes of section 106(6) FA 2006 (see GREIT02015) at some stage during the take-over bid, and would, therefore, fail Company Condition 4. Normally, this would also stop the regime applying from the end of the previous accounting period.

But, where the company that made the bid is also a UK-REIT, or part of a Group REIT, the target remains in the regime, despite having failed Company Conditions 3 or 4 for the accounting period in which the take-over happened (regulation 2 SI 2006/2864).

Breaches of Company Conditions 3 or 4 as a result of a take-over by another UK-REIT do not count towards the number of times conditions can be breached before being expelled from the regime (regulation 8(3)(a) SI 2006/2864).

If the company that makes the bid is not also a UK-REIT, or member of a Group REIT, then the target will generally cease to be a UK-REIT from the end of the accounting period before the listing requirement or ‘not close’ condition was breached (regulation 3 SI 2006/2864). The exception to this is where the breach is remedied by the end of the accounting period following the one in which the breach occurred. In that case, the company can remain in the regime, provided it meets all the other conditions for being in the regime.

A REIT should talk to HMRC if it is concerned about how being subject to a take-over bid will affect REIT status

Example

Companies P and T both make their accounts up to 31 December. T is a UK-REIT. P is the principal company of a group. In May 2008, P launches a bid for T. P’s stake in T increases, the bid goes unconditional and on 1 November 2008, T ceases to be listed and is a subsidiary of P.

If P’s group is not a Group REIT, T stops being a UK-REIT with effect from 31 December 2007. The profits and gains of its property business arising after 1 January 2008 are taxable (although T will continue paying distributions under deduction of basic rate tax until it has distributed all the tax-exempt income and gains that arose up to 31 December 2007).

If P’s group is a Group REIT, then T does not cease to be a UK-REIT between 1 January and the date it ceased to be close or lost its stock exchange listing (paragraph 33(2)(c) Schedule 17 FA 2006). No Entry Charge is levied when T joins the Group REIT and neither is there a deemed sale and reacquisition of the assets of the tax-exempt business of T (paragraph 33(2)(a) and (b) Schedule 17).