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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Miscellaneous: funds awaiting re-investment


The general rule for UK-REITs is that cash or other liquid funds are not assets of thetax- exempt business for the purposes of the 75/25 Balance of Business asset test insection 108 FA 2006. There is one exception to this: where funds are the proceeds of saleof a tax- exempt business asset that are awaiting re-investment (section 118 FA 2006).

For this to apply, the proceeds must be held as ‘cash’. For this purpose, ‘cash’ isdefined as being cash of any currency held on deposit or invested in Government gilts orbonds (as described by Part 1 Schedule 1 FA 1942).

Proceeds from the sale of an asset of the tax-exempt business that are held as cash cancount as an asset of the tax-exempt business for the 75/25 asset test for 24 monthsfollowing the date of disposal.

Funds awaiting reinvestment remain in that category until such time as the cash isactually spent – it is not sufficient to have identified a new project to which thosefunds will be committed.

Part disposals and mixed use assets

Section 118(1)(b) refers to disposal of an ‘asset used wholly and exclusively for thepurposes of tax-exempt business’. However, the ‘funds awaiting reinvestment’ rule alsoapplies to the proceeds of disposal of part of an asset, and to the proceeds of disposalof an asset that is used partly for tax-exempt and partly for non tax-exempt business.

Proceeds of the disposal of part of an asset follows from section 142(a) (interpretation),which says that in the UK-REIT legislation, reference to ‘an asset’ includes a referenceto part of an asset.

Dual-use assets are dealt with explicitly in section 118(5). An asset that has beendisposed of may have been used partly in the tax-exempt business and partly in the nontax-exempt business. If the tax-exempt business use was for longer than a yearin aggregate then partof the proceeds, if held as cash, can count as a property rental business asset for the75/25 test.

There is no set formula for apportioning the proceeds: it should be determined reasonablyon the basis of the length of time and extent to which that asset had been used in eachbusiness.

Income arising on funds awaiting reinvestment

Even though the funds will count as an asset of the property rental business for the75/25 asset test, any interest or other income arising does not count asproperty rental business income for the 75/25 income test. Neither is the income arisingexempt from tax – any interest on surplus proceeds of sale will be taxable.

Funds awaiting initial investment

A UK-REIT may raise funds either by issuing shares or borrowing, with a view toinvesting in property that will form part of the tax-exempt business. The rule in section118 does not apply to allow funds of this kind to count as tax-exemptbusiness assets for the 75/25 test. If a UK-REIT finds that it does not meet the 75/25asset test for this reason, they may be able to remain in the regime if the breach is nottoo large, too frequent or repeated too often (see regulation 7 SI 2006/2864 and GREIT07005).