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HMRC internal manual

Guidance on Real Estate Investment Trusts

Breaches of conditions: multiple breaches

The regulations that set out the consequences of breaching each of the regime conditions specify how many times each condition can be breached before termination of the regime. This is generally two in any ten year period. If the UK-REIT breaches different conditions, regulation 8 SI 2006/2864 sets out how many breaches can occur before the UK-REIT must leave the regime. This is four in any ten year period. For an example, see GREIT07070.

For the multiple breach rules to apply, the UK-REIT must breach two conditions, but contained in different sections of FA 2006. Thus breaching the Balance of business Condition (income test) in section 108 and property condition 1 (three or more properties) in section 107 would count as two different conditions for this purpose, since they are in different sections.

Breaches not to be taken into account are in Regulation 8(3), these are

  • breaches of conditions 3 and 4 of section 106 when a REIT company becomes part of another REIT group,
  • breaches of conditions 3 and or 4 of section 106 when the company relies on section 109(3)-(6),
  • a breach of the balance of business income test in the specified accounting period (the accounting period specified in the section 109 notice from which part 4 FA 2006 is to apply)
  • a breach of the balance of business asset test in the circumstances detailed in Regulation 7 SI 2006/2864. 

Multiple breaches of conditions in the same section

The rules in regulations 5 and 7B (breach of properties and Balance of business conditions) has the same four strikes and out consequence. For example, breaching the Balance of business Condition 1 (income test) and the Balance of business Condition 2 (asset test) would not count as different conditions for regulation 8, since they are conditions in the same section. The UK-REIT can breach the income test twice in ten years and the asset test twice in ten years, but if either condition is breached again within the ten year period, the regime will cease to apply as a result of regulation 7B(7).

Breaches lasting for more than one accounting period

For the property conditions and the Balance of business conditions, a breach that continues for two consecutive accounting periods counts as a single breach for the purposes of the multiple breach rule. If the breach lasts three consecutive accounting periods, the breach is serious and the regime ceases to apply (regulations 5(5) and 7B(4)).

Breaches resulting from take-over

If a breach of the listing requirement or of the ‘not close’ condition is the result of being taken over by another UK-REIT, it does not count towards the four breaches that are allowed in ten years (regulation 2).

Interest cover test and maximum shareholding rule

Breaches of the interest cover test or the Maximum shareholding rule do not count as breaches for the purposes of the four times in ten years rule.

Ten year time limit

The ten year time limit runs from the date the company fails the condition, which may not be the same as the date of the event that triggers the failure. For example, if the UK-REIT sells all but two of its properties on 1 May 2008, property condition 1 is failed with effect from 1 January 2008 (assuming a 31 December accounting date). The ten year period therefore runs from 1 January 2008 and not from 1 May 2008.

Although it may be some time before the company is aware that a breach has occurred (for instance, becoming close because of the actions of shareholders), the company must inform HMRC as soon as they do become aware. For the purposes counting up repeat breaches, either of one particular condition or multiple breaches of two or more different conditions, within the relevant time limits, the clock starts when the breach occurs, and not when the company becomes aware of it or when it notifies HMRC.