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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Miscellaneous: indirect ownership of property: Balance of business Conditions


The Balance of business conditions are a hurdle the group or company has to pass tojoin and remain in the regime. For Group REITs, accountancy concepts are used to determinethe treatment of income, expenses and asset values where the property is held by an entityother than a member of the TCGA group. For deciding if the income and gains arising onindirectly held property are tax-exempt or whether Entry Charge is payable, see GREIT09020 and GREIT09025.

Group REITs: accountancy rules for other entities

For the Balance of business conditions, the 75/25 comparison of income and asset valuesis generally by reference to accountancy measures and the accountancy concept of groupconsolidated accounts. For example, intra-group transactions and balances are ignored. Anaccountancy approach is also taken to deciding when the assets, income etc areconsolidated on what amounts to a line-by-line basis, rather than including the value ofgroup members’ interests in the entity as a balance sheet asset. The accountancyapproach is based on the level of influence group members have in the entity, and not byreference to whether or not the entity is transparent.

This principle translates into taking account of the underlying income and assets ofentities where the group has significant influence. For the purposes of the UK-REIT rules,this is where group members’ interest in the entity is more than 20%. Where thegroup’s influence is not significant, the value of the group’s interest in theentity counts as a non-ring fence asset.

The consequence of this 20% cut-off is that some entities that are tax-transparent (forexample partnerships) will be treated as opaque if the group has less than 20% interest init. However, this treatment for the Balance of business Conditions does not determine thetax treatment of property income and gains on disposals of the entity’s assets, northe incidence of the Entry Charge.

The exception to the level of influence test is for companies that are not members of theTCGA group. The value of the group’s interest counts as a non-ring fence asset, evenif the interest is more than 20%.

Single company UK-REITs and other entities

Apart from where there is a Joint Venture Look-Through notice in place, a singlecompany UK- REIT does not prepare financial statements that consolidate activities acrossthe entities in which it has an interest. In this case, the Balance of business Conditionstake account of the legal nature of the vehicle and do not differentiate between interestsin the entity above or below 20%. For example, if a single company UK-REIT has a 15%interest in a partnership, 15% of the income and assets of the partnership are included inthe Balance of business asset and income tests. If the single company UK-REIT has an 85%interest in a company, the income and assets of the company are not included in theBalance of business asset and income tests: the value of the shareholding counts as a nonring-fence asset.