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HMRC internal manual

Guidance on Real Estate Investment Trusts

Miscellaneous: indirect ownership of property: Entry Charge and exemption from tax

Whether Entry Charge is due and whether income and gains from indirectly held property are tax-exempt depends on the legal nature of the entity through which it is held. For treatment of income and asset values for the Balance of business Conditions, see GREIT09015. For the application of the Tax-exempt business conditions (including the 90% distribution requirement), see GREIT09025.

Nature of the entity

For deciding if the profits (income and gains) of a property rental business are exempt from tax, and for the Entry Charge, the legal nature of the vehicle generally decides the question. The exceptions are for joint venture companies where the there is a Joint Venture Look-Through notice in place, and for Group REITs, for companies that are members of the TCGA group (see GREIT09010).

Transparent treatment

The principle of relying on the nature of the entity means that qualifying UK property and overseas property income derived from an interest in a tax-transparent entity, such as a partnership, is tax-exempt (to the extent of the company or group’s interest in the entity). For the Entry Charge, the market values of the underlying property assets are taken into account, again to the extent of the company or group’s interest in the entity.

These consequences apply to all entities in which members of a Group REIT have an interest (apart from members of the TCGA group - see GREIT09015). For single company UK-REITs, they apply to transparent entities in which the company itself has an interest.

If the single company UK-REIT has a subsidiary, the income, assets etc of a transparent entity in which the subsidiary has an interest are apportioned to the subsidiary in the normal way. The market value of property is not taken into account for the Entry Charge and UK property/ overseas property income is taxable, as are any gains on disposal of the entity’s property.

Opaque treatment

If the entity is opaque for tax purposes, for example a company that is not a member of the TCGA group, the property income of the entity is taxable and no Entry Charge is due in respect of the entity’s property. Any gains on disposal of the entity’s property are also chargeable. The opaque treatment does not apply to Group REITs for companies that are members of the TCGA group. A look-through’ treatment applies to these companies (see GREIT09015).