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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Group REITs: non-resident group members: tax-exempt business

Where the UK property rental business of a non-resident subsidiary of Group REIT is not excluded from the definition of tax-exempt business by Schedule 16 FA 2006, the company is exempt from UK tax on the rental income. The gains on disposal of any property used in such a business are also exempt from UK tax.

General case

If a non-UK resident company owns UK property, unless it is effectively connected with a trade carried on through a UK permanent establishment, the rent is chargeable to income tax under Chapter 3 of Part 3 of ITTOIA. The gains on such property would not normally be chargeable to capital gains tax, being owned by a non-resident.

By a rather circuitous route, the income from UK property owned by a non-resident subsidiary of a Group REIT is exempt from UK tax. This is done in a number of steps.

  • The UK property rental business of the non-resident subsidiary is deemed to be within the charge to corporation tax for the purposes of Part 4 of FA 2006 (paragraph 32(3) Schedule 17).
  • The exemption from corporation tax that applies to the income profits of the property rental business of a single company Real Estate Investment Trust is applied to this property rental business by paragraph 32(4).
  • The exemption from corporation tax that applies to the capital gains profits of the property rental business of a single company Real Estate Investment Trust is applied to this property rental business by paragraph 32(6).
  • The profits of the property rental business are exempted from income tax (paragraph 32(5)).

The profits of this tax-exempt business are then fed into the rules that apply to profits of the tax-exempt business of the UK resident members of the group by paragraph 32(8). This includes the 90% distribution requirement, the requirement to distribute under deduction of basic rate income tax and to the rules for administering the deduction at source requirement.

The profits of the tax-exempt business of the non-resident subsidiary are also reflected in the financial statement of G (property rental business).

The Non Resident Landlord Scheme does not apply to the rents, since paragraph 32(5) Schedule 17 FA 2006 removes the charge to income tax on the rents that are part of the tax-exempt property rental business.

Property effectively connected to trade of UK permanent establishment

If the non-UK resident company owns UK property, and it is effectively connected with a trade carried on through a UK permanent establishment, the rent is chargeable to corporation tax as property income, and the gains on such property would be chargeable to corporation tax.

This property rental business automatically falls within the section 104 definition of property rental business, and the profits count towards the 90% distribution requirement. As the profits and gains are chargeable to corporation tax, the exemptions provided in sections 119 and 124 FA 2006 apply anyway.