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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Group conditions and rules: Balance of Business Conditions: income test

The income test compares the income of the property rental business of the group with the total income of the group from all its activities. The property rental business income must be 75% or more of the total income of the group.

For the definition of ‘property rental business’ for this purpose, see GREIT12000. Note that this is not restricted to the property rental income that is exempt from tax as a result of the application of the UK-REIT legislation.

Definition of ‘income’

‘Income’ for this purpose is measured using international accounting standards (IAS). Income is before deduction of tax and excludes realised and unrealised gains that may be included in the P&L account under IAS. It also excludes items that, under IAS, are taken to equity rather than P&L.

Certain ‘exceptional items’ are also excluded from the defintion (section 108(2)(b)(iii) is applied to groups through Paragraph 7 of Schedule 17 and Regulation 7 of SI2006/2865). These are items that arise from events or transactions that are outside the ordinary transactions of the group, and are not exepcted to recurr regularly or frequently. This may differ from items that are or would previously have been treated as exceptional under IAS or UK GAAP.

Intra-group transactions

The test uses income on a group-consolidated basis, and intra-group transactions are generally ignored. A part of the intra-group transactions are not be ignored if non-group members own shares in subsidiaries. The amount that is not ignored is the percentage represented by the beneficial interest in the subsidiary that is owned by non-group members. Beneficial entitlement is measured by reference to the beneficial entitlement to profits available for distribution to shareholders.

Use of financial statements of G (property rental business) and G (residual)

The income of the property rental business for this purpose is as shown in the Financial Statement for G (property rental business) for the relevant accounting period (see GREIT12115 onwards). The total income is the sum of the income shown in the Financial Statement for G (property rental business) for the relevant accounting period and the income shown in the Financial Statement for G (residual) for the same accounting period.

Entities that are not members of the ‘group’

Members of the group (i.e. 75%/ effective 51% subsidiaries of the principal company) may have interests in other entities. The treatment of the group members’ interests in these other entities (and, where apropriate, their underlying income) flows from how the interests are dealt with in the Financial Statements for G (property rental business) and G (residual) (see GREIT12140).

Joint ventures

A joint venture company or group has to meet the balance of business income test on its own account, see GREIT12010 for details of the Regulations.