This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Guidance on Real Estate Investment Trusts

Miscellaneous: indirect ownership of property: Tax-exempt business conditions

Where property is held indirectly, the nature of the entity through which the property is held generally determines its treatment for the Tax-exempt business conditions. For the Balance of business conditions, see GREIT09015) and for exemption from tax of income and gains and application of the Entry Charge, see GREIT09020.

Property conditions

The two property conditions are that a qualifying property rental business must include three or more properties and that no one property can be more than 40% of the value of tax- exempt business properties for the business to be tax-exempt.

Single company UK-REIT

The two property conditions must be met by the tax-exempt business of the company. This means that qualifying property owned directly by the company counts.

If the company owns property via a tax-transparent entity, although the property will count towards the Balance of business conditions, it will count as a ‘single’ property for the purposes of the Tax-exempt business property conditions only if the company owns 100% interest in the entity. This is because the properties involved in the property rental business of the company must be capable of being rented out as a unit separate from any other.

For example, where the company has 40% interest in a partnership which owns a property, the company’s property rental business includes only its aliquot (40%) share of income from the property. It is difficult to see how 40% interest in a property held via a partnership can be rented out separately from the other 60%.

Group REIT

The property rental businesses of the members of the group are treated as a single business for the Tax-exempt business conditions. This means that a property owned directly by group members counts as a single property even if ownership is spread across several members of the group.

Property owned by group members via partnerships or transparent unit trusts would not count for the same reasons as it doesn’t for single company UK-REITs (unless of course group members owned all the units in the unit trust or comprised all the partners).

90% distribution condition

A UK-REIT is required to distribute 90% of the income of its tax-exempt business as PID. The tax-exempt income is the income of C (taxexempt) for a single company UK-REIT. The extent to which income from indirectly held property is included in this depends on the legal nature of the entity (see GREIT09020). Where the entity is tax-transparent (e.g. a partnership), qualifying property rental income arising in the entity is included, to the extent of the company’s interest in the entity. If the entity is opaque (e.g. a company that is not a joint venture company in respect of which a look through notice has been made), property rental income of the entity is not included in the amount that has to be distributed.

For a Group REIT, the tax-exempt income is the aggregate of the tax-exempt income of each group member which carries on a qualifying property rental business, to the extent of the group’s interest in the company. The extent to which income from indirectly held property is included in this depends on the legal nature of the entity (see GREIT09020 and above).