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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: Balance of business Conditions

Two conditions of the regime relate to the amount of qualifying property rental business carried on by the UK-REIT compared with non-qualifying business. There are no additional tax charges as a result of breaching either condition, but if they are broken by too much or for too long, the regime ceases to apply. This is set out in regulation 7B SI 2006/2864. If either of the Balance of business conditions are not met in three successive accounting periods HMRC may issue a Notice of Termination under section 129(2)(c).

Breaching the income test

The income arising from the tax-exempt business (for a single company UK-REIT) or the property rental business (for a Group REIT) must be at least 75% of the total income of the group or company (Balance of business Condition 1 - see GREIT02070 for detail). This test applies to the accounting period as a whole.

If the UK-REIT fails the income test for an accounting period, the company or group may remain in the regime provided the income of the tax-exempt or property rental business has not fallen below 50% of the total for the accounting period. If it falls below 50%, the breach is regarded as serious - see GREIT07060.

The income of the tax-exempt or property rental business can remain between 50% and 75% of the total for the following accounting period without triggering termination of the regime.

Remaining below 75% but above 50% for two consecutive accounting periods counts as a single occasion on which regulation 7B is relied upon to remain in the regime.

Breaching the asset test

The other Balance of business Condition is that 75% of the assets of the company or group must be involved in the tax-exempt or property rental business (Balance of Business Condition 2 - see GREIT02075 for detail). This test must be met at the start of each accounting period

If the UK-REIT fails this test at the start of an accounting period, the company or group may remain in the regime provided the value of the assets involved in the tax-exempt or property rental business has not fallen below 50% of the total at that date. If it falls below 50%, the breach is regarded as serious - see GREIT07060.

The value of the assets involved in the tax-exempt or property rental business can remain between 50% and 75% of the total at the start of the following accounting period without triggering termination of the regime.

Remaining below 75% but above 50% at the start of two consecutive accounting periods counts as a single occasion on which regulation 7B is relied upon to remain in the regime.