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HMRC internal manual

Guidance on Real Estate Investment Trusts

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

C is a UK-REIT and makes up its accounts to 31 December. At 1 January 2008, C has six properties, P1 to P6, in its tax-exempt business. The fair values are P1 = 60, P2 = 40, P3 = 100, P4 = 300, P5 = 390 and P6 = 110, total fair value 1,000.

Scenario 1: one property exceeds 40% of the total value

On 1 February 2008, C sells P3, reducing the total fair value to 900. Since the fair value of P5 now exceeds 40% of the total, C’s property rental business fails property condition 2 for accounting period ending 31 December 2008.

If C does not change its property portfolio by 31 December 2009, then C ceases to be a UK-REIT with effect from 31 December 2009 (since the company will have breached the requirement in three successive accounting periods).

C buys a new property P7 on 1 November 2009, fair value 150. The fair values of the other properties are unchanged. Although C no longer has one property exceeding 40% of the total value of the assets in the property rental business, it does not meet property condition 2 for accounting period ending 31 December 2009, since the condition has to be met throughout the accounting period. C has therefore failed property condition 2 for two successive accounting periods, but has met it again in the third.

C can therefore remain in the regime in spite of having been in breach of property condition 2 for two accounting periods. This is because two successive accounting periods counts as a single reliance on regulation 5 to remain in the regime.

Scenario 2: fewer than three properties

C sells P4, P5, P6 and P7 on 1 July 2012, retaining only two properties, P1 and P2. C has therefore failed property condition 1 for the accounting period ended 31 December 2012.

C buys another property P8 fair value 60 on 1 December 2013. Although C no longer has fewer than three properties in the property rental business, it does not meet property condition 1 for accounting period ending 31 December 2013, since the condition has to be met throughout the accounting period. C has therefore failed property condition 1 for two successive accounting periods, but has met it again in the third.

C also failed property condition 2 for the accounting periods ending 31 December 2012 and 13, since P1 is more than 40% of the fair value of the properties for part of both periods. However this does not count as a separate breach of a property condition for the purposes of deciding if regulation 5 has been relied on more than twice in ten years. This is because breach of property condition 2 is a necessary consequence of breaching property condition 1 (regulation 5(3)).

C can remain in the regime in spite of having been in breach of property conditions 1 and 2 for two accounting periods.

Scenario 3: repeated breaches

The facts are as outlined for scenario 1 as followed by scenario 2, except that C delayed buying P7 until 1 February 2010.

C is in breach of property condition 2 for three successive accounting periods. This will result in a notice from HMRC that C ceases to be a UK-REIT with effect from 31 December 2009 (regulation 5(5)). The three consecutive accounting periods breach does not count as a two-year ‘single’ breach followed by a second breach.

Scenario 4: not a necessary consequence

The facts outlined for scenario 2 apply, except that the fair value of P8 is 20 so that the value of P1 still exceeds 40% of the new total value of 120 for P1, P2 and P8. On 1 March 2014, C buys P9, fair value 60. C remains in breach of property condition 2 for accounting period ending 31 December 2014, but meets it again for the following period.

(Alternatively if the fair value of P8 had been 100 then C would still have been in breach of property condition 2 as now the value of P8 exceeds 40% of the new total of 200 (P1=60, P2=40, P8=100)).

The breach of property condition 2 in accounting period ending 31 December 2014 is not as a necessary consequence of breaching condition 1. It therefore counts as a separate occasion on which regulation 5 has been relied on to remain in the regime.

Scenario 5: ten year time limit for repeat breaches

The facts are as outlined in scenario 1 and 2: C has relied on regulation 5 twice to remain in the regime. C again sells all but two of its properties on 15 January 2018, but buys another four on 1 July 2018.

C is in breach of property condition 1 for accounting period ending 31 December 2017. Although the event that triggers this third breach is less than ten years after the event that triggered the first breach, the ‘three strikes in ten years’ rule does not bite because the ten year period runs from the start of the accounting period in which the first event happened.