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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Groups: entry to the regime: effects of entry: cessation of business, accounting periods, losses and deemed sale and reacquisition of assets


On joining the regime, a line is drawn between the property rental activities of eachgroup member before entering the regime, and those that are carried on and exempt from taxwhile the company is a member of a group that is within the regime. This is done in twoways: one is to deem the pre-REIT property business of each company to cease for taxpurposes; the other is to cause the accounting period of each company to come to an endfor CT purposes on joining the regime.

Where a company joins the group after the section 109 notice comes into effect, the samerules apply to the business, accounting periods and assets owned by the new group member.

Cessation of business, accounting periods and pre-entry losses

The rules outlined in GREIT03015 apply to the pre-entrybusiness, pre-entry losses and accounting periods of each company that is a member of thegroup at the date it joins the regime. This is a consequence of the modifications inparagraph 9(1) and (3) Schedule 17 to the rules for single company UK-REITs in section111(1) and (5) FA 2006.

The allowability or otherwise of pre-entry losses etc is shown in tables at GREIT03100 (for capital losses) and GREIT03110(for everything else).

Deemed sale and reacquisition of assets

The assets that were involved in the property rental business of each company beforethe group joined the regime are treated in the same way as the assets of C (pre-entry), asdescribed in GREIT03020. This is a consequence of themodifications in paragraph 9(2) Schedule 17 to the rules for single company UK-REITs insection 111(2) and (3) FA 2006.

For capital gains purposes, the deemed transactions are at market value, and any gain orloss on entry to the regime is ignored for tax purposes. For capital allowance purposes,the transfers take place at tax written-down value such that no balancing charges orallowances arise.

Note that although the profits of the tax-exempt business of each member of the group willnot be liable to CT, each company must calculate a ‘shadow’ capital allowanceclaim in order to determine their amount of tax-exempt profits which determines how muchthe principal company must distribute to meet the 90% PID requirement.

Minority share holdings – portion of assets disregarded

Where a member of the group is not 100% owned by the principal company or other groupmembers, the deemed sale and reacquisition rules apply to only a portion of the assets ofthe company (paragraph 9(4) Schedule 17 FA 2006). The portion taken into account is whatis left after disregarding the percentage of the assets that are excluded from thefinancial statements of G (property rental business), as set out in paragraph 31(5)Schedule 17. This is a percentage equal to the beneficial interest in the company held bynon-members of the group.

For example, 80% of the ordinary share capital of company S is owned by members of GroupREIT G. Before G joins the regime, S owns and rents out one property with market value atthe date of entry of 1,000 and base cost for capital gains purposes of 800. S sells theproperty for 1,500 two years after G joined the regime.

S (pre-entry) is deemed to sell and repurchase 80/100 of the property. The gain at entryof 160 (= 1,000 x 80/100 – 800 x 80/100) is ignored for tax purposes. The gain on thepart of the asset that is within the tax-exempt business of S post-entry is tax-exempt.The taxable gain (ignoring indexation) on the part of the asset that is in the residualbusiness of S post- entry is 140 (= 1,500 x 20/100 – 800 x 20/100).

Non-resident group members

Although the modifications set out above apply to UK resident members of the group, thesame consequences flow for non-resident group members. To the extent they are needed tocompute the Entry Charge, paragraph 11(1)(d) Schedule 17 invokes the necessary parts ofsection 111 FA 2006. The part about ignoring chargeable gains is not needed, as gains inthe hands of a non-resident are exempt under section 2 TCGA. There is no need to deem anew accounting period to begin because this happens anyway under section 9 CTA2009, asthe company so far as it carries on UK property rental business, comes within the chargeto CT (paragraph 32(3) Schedule 17 FA 2006) for the first time.