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HMRC internal manual

Guidance on Real Estate Investment Trusts

Groups: leaving the regime: overview

Once the principal company of group has given notice that it wants the UK-REIT rules to apply, they continue to apply to the group until a notice to withdraw from the regime is given either by the principal company (see GREIT06020) or by HMRC (see GREIT06025). If a the principal company of a Group REIT breaches certain of the Company Conditions, application of the UK-REIT rules to the group is terminated automatically (see GREIT06030).

No ‘exit charge’ is payable, although the tax treatment of some disposals in the post-cessation period may be affected (see GREIT06015).

The requirement to pay distributions net of basic rate tax does not stop once the group leaves the regime. It continues until the principal company has paid out an amount equivalent to all the profits of the tax-exempt business of companies that were members of the Group REIT of which it was the principal company.

Date of cessation

The date from which the UK-REIT rules cease to apply depends on what prompted cessation. In general, if the group leaves the regime voluntarily, the regime ceases to apply from a date after the principal company gives notice. If HMRC gives notice that regime no longer applies to the group (or to any company that is a member of the group), in most cases, the regime will cease to apply from a date before the notice is given. If the termination is automatic, the regime ceases to apply from the end of the accounting period before the breach occurred.

There are exceptions to the general rules for date of cessation when the group has been a UK- REIT for less than ten years and the cessation is a result of either an HMRC termination under section 129 or automatic termination as a result of breaching a Company Condition (section 130) – see GREIT06035.

Consequences of cessations – overview

On leaving the regime, a line is drawn between the property rental activities of members of the group after leaving the regime, and those that are carried on and exempt from tax while the group is within the regime. All the assets that move out of the tax-exempt business are treated as though they have been sold by the member of the group just before it leaves the regime, and immediately reacquired by the post-cessation business after it leaves.

This sale and reacquisition is deemed to take place at market value but does not give rise to a chargeable gain (or allowable loss). For capital allowance purposes, the transaction is 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.

Any losses that may have arisen in the tax-exempt business cannot be carried forward for use against future profits of the post-REIT property business of group members. Losses on non- ring fence activities are however available for use against post-REIT profits in the normal ways.

Losses on disposal of property of the tax-exempt business cannot be carried forward for use against chargeable gains arising after the group has left the regime. Losses on disposal of non-ring fence assets can be carried forward for use against chargeable gains that accrue after the group has left the regime.