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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Breaches of conditions: number and value of properties

To join and remain in the regime, a UK-REIT is required to own at least three qualifying properties and for no one of those properties to represent more than 40% by value of the assets of the property rental business. (Tax-exempt business Conditions 1 and 2 - see GREIT02020 onwards for detail). These conditions have to be met throughout each accounting period.

If the UK-REIT fails either or both of these conditions, the company or group may remain in the regime provided it remedies the breach quickly and has not breached the two conditions more than once before in the previous ten years (regulation 5(2) SI 2006/2864). Here ‘quickly’ means by the end of the accounting period following the one in which the breach happened.

Although the relevant regulation covers both of the property conditions, it is easier to deal with breaching either of them separately, and then both together when considering the consequences of the rule. The examples at GREIT07035 show how the rules interact.

Repeat and multiple breaches - termination

If either of the property conditions are breached more than twice in ten years, the regime ceases to apply with effect from the last day of the accounting period before the property condition was breached for the third time.

If a breach of either of the property conditions follows four other breaches of other conditions within ten years, then, under the multiple breach rules in regulation 8 SI 2006/2864, the regime ceases apply with effect from the last day of the accounting period before the property condition was breached.

For the purposes of deciding whether there have been multiple breaches of these conditions in particular, or of the regime conditions in general, a failure of either property condition that lasts for two accounting periods (but no longer) counts as a single breach. If property condition 2 is breached as a consequence of breaching property condition 1, this breach does not count as a separate breach.

Breach lasting three accounting periods

If a breach of either of the property conditions lasts for three or more successive accounting periods the company or group cannot remain in the regime (regulation 5(5) SI 2006/2864). HMRC will then give notice under section 129(1)(a) FA 2006 that the UK-REIT regime ceases to apply with effect from the end of the second accounting period (being the end of the accounting period before the accounting period of the last event that triggered the notice - section 129(5)).

Serious breach

If HMRC thinks that a breach of the property conditions is serious, they may give notice to the company to remove the company or the group from the UK-REIT regime (section 129(2)(c) FA 2006). 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.