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HMRC internal manual

Guidance on Real Estate Investment Trusts

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HM Revenue & Customs
Updated
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Groups: leaving the regime: effects of cessation: deemed sale and reacquisition of assets

 

When the group leaves the regime the property rental business of the tax-exempt part ofeach group member (referred to here as GM (tax-exempt) etc) is treated as ceasing on thelast day the regime applies to the group. The assets that were involved in GM(tax-exempt)’s business are treated as though they had been disposed of andreacquired by the GM (post-cessation)’s business (section 131(2) as modified for groups byparagraph 26 Schedule 17 FA 2006).

An asset is ‘involved in the business’ for this purpose if it would be aproperty involved in the business for the purposes of the Tax-exempt business Conditionsin section 107 – see GREIT02025.

Capital Gains

The deemed disposal of assets takes place at market value, which takes the same meaningas it does for TCGA purposes (section 143(e)). This is the price that the assets mightreasonably be expected to fetch on a sale in the open market with a willing buyer andseller negotiating on the basis of full information (see CGM16330).

If the deemed sale and reacquisition would result in a gain for GM (tax-exempt), this isnot treated as a chargeable gain for TCGA purposes because the exemption from tax oncapital gains in section 124 (section 111(7) FA 2006) applies to gains on these disposals.If the result is a loss, that loss is not allowable for TCGA purposes.

The principal company of groups that are in the regime have to be stock exchange-listed.This means that those listed in the UK will be following RICS (Royal Institute ofChartered Surveyors) guidelines in valuing the properties on their books, and valuationswill therefore be professional and recent. As a rule of thumb, values shown in thepublished accounts should be a reliable starting point for determining market value forthis purpose. For guidance on valuing property, see CGM74000 onwards.

This deemed sale and reacquisition effectively sets a new base cost for capital purposesgoing forward. For interactions of cessation provisions and capital gains claims andelections that can be made, see GREIT05050.

Capital allowances

For capital allowance purposes, the transfer takes place at tax written-down value suchthat no balancing charges or allowances arise to GM (tax-exempt). The effect of this isthat GM (post-cessation) property business takes over the capital allowance position of GM(tax- exempt)’s business.

For interactions of cessation provisions and capital allowances claims and elections thatcan be made, see GREIT03020.

Indirectly held property

The extent to which property held via partnerships etc is treated as sold andreacquired at cessation will depend on the nature of the entity through which it is held.For more information on this, see GREIT03030.