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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: entry charge: general

When a group joins the UK-REIT regime, an Entry Charge of 2% of the market value of the properties that transfer into the tax-exempt business is payable (section 112 as modified by paragraph 11 Schedule 17 FA 2006). The charge does not fall entirely on the principal company of the group. It is payable by the group members (including the principal company) in proportion to the market value of the properties each of them owns that transfer into their own tax-exempt business on entry.

The timing and mechanism for payment are the same as described in GREIT03025 for single company UK-REITs. No losses, expenses, allowances or group relief may be set off against this notional income or the tax arising (section 112(4)).

Each member of the group may make an election under section 112(5) to pay their portion of the Entry Charge by instalments, but its notice of election must accompany the section 109 notice given by the principal company for the group to join the regime.

Minority share holdings - portion of assets disregarded

Where a member of the group is not 100% owned by the principal company or other group members, the Entry Charge is limited to a portion of the market value of the assets at the date of joining (paragraph 11(1)(c) Schedule 17 FA 2006). The portion taken into account is what is left after disregarding the percentage of the assets that are excluded from the financial 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 by non-members of the group.

For example, 80% of the ordinary share capital of company S is owned by members of Group REIT G. Before G joins the regime, S owns and rents out one property with market value at the date of entry of 1,000. Assuming the main CT rate is 28% when G join the regime, with other chargeable income of 57.14 (= (80/100 x 1,000/28%) x 2%) arises to the residual part of S, where it will be chargeable at 28%.

Non-resident group members

Although the modifications set out above apply to UK resident members of the group, the same consequences follow as a result of paragraph 11(1) Schedule 17 FA 2006, which modifies sections 111 and 112 specifically for non-resident members of the group.

Note that the Entry Charge is payable by the residual part of the non-resident company - which may be within the charge to IT or CT in respect of other activities, or not otherwise chargeable to UK tax. This is why the Entry Charge is expressed without reference to CT rates, as other chargeable income of:



 Market Value   x 2%
Tax Rate  


where Tax Rate is the percentage rate at which the residual part of the company is chargeable to tax. If the non-resident company carries on a trade through a UK PE, this will be the main CT rate of 28%. Otherwise the rate is basic rate income tax. When multiplied by the applicable rate, the end result is UK tax payable of 2% of the market value of the properties in the UK property rental business of the non-resident company.

Indirectly owned property

Members of the group may hold property via other entities such as unit trusts, partnerships and joint ventures. For detail on how this is treated for the Entry Charge, see GREIT03030.