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HMRC internal manual

Guidance on Real Estate Investment Trusts

Groups: entering the regime: overview

Groups joining the regime

The UK-REIT regime is elective, and can apply to a single company and to a group ofcompanies (referred to as a ‘Group REIT’ in this guidance).

For the tax exemptions to apply to the property rental business of members of a GroupREIT, the principal company and the group must meet the necessary conditions and theprincipal company must give notice that it wants the UK-REIT rules to apply to the groupof which it is the parent, to its distributions and to the investors who receive thosedistributions. Note that the regime applies to a group from the date specified in thenotice, and not from the day the notice is given.

On joining the regime, a line is drawn between the property rental activities of membersof the group before entering the regime, and those that are carried on and exempt from taxwhile the regime applies. All the assets that move into the tax-exempt business of a groupmember are treated as though they have been sold by the company just before the groupjoins the regime, and immediately reacquired by the tax-exempt business after it joins.

This sale and reacquisition is deemed to take place at market value but does not give riseto a chargeable gain (or allowable loss). For capital allowance purposes, the transactionis deemed to take place at a value that results in no balancing charges or allowances– and ‘stand-in- shoes’ treatment applies to the ‘new’ owner.

An Entry Charge is payable at 2% of the value of property assets that are moved to thetax- exempt business. This is payable at the same time as CT due for the first accountingperiod that the group is in the regime. A group joining the regime may choose to pay theEntry Charge in four yearly instalments, in which case the charge is increased slightly totake account of the time value of money.

The group remains in the regime until either a notice to withdraw from the regime is givenby the principal company or by HMRC or the principal company or group breaches aqualifying condition in such a way that the regime ceases to apply.

Minority share holdings

Not all members of the group will be 100% owned by the principal company or other groupmembers. In this case, the regime applies only to the portion of the company that is ownedby group members. For example, company S is 80% owned by the group and has property assetswith market value 1,000 on the date the group joins the regime. The Entry Charge payableby the residual part of S is 80% x 1,000 x 2% = 16.

Non-resident group members

To the extent that a non-resident member of the group carries on UK property rentalbusiness, the profits (income and gains) are exempt from UK tax (see GREIT11100). Similar consequences in terms of deemed sale andreacquisition of assets and Entry Charge apply to the assets of the non-resident groupmember that are involved in a UK property rental business carried by it.