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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: asset test

The asset test compares the value of the property involved in the property rental business of the group with the total value of assets of the group, used for all its activities. The property rental business assets must be 75% or more of the total assets of the group.

The definition of asset used in the property rental business is in section 107(7)(a) FA 2006. It means an estate, interest or right by exploitation of which the business is conducted (see GREIT01020 for more information on this).

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

Valuation of assets

The assets are valued using IAS, but no account is taken of liabilities secured either generally or specifically against any of the assets. For example, if a property that could be sold for £1,000 has a mortgage secured against it of £300, the value for the asset test is £1,000. If a creditor has a £500 floating charge on the assets of the group, that too is ignored for this purpose.

If IAS offers a choice between cost basis and fair value, fair value must be used.

Intra-group balances

Intra-group balances and holdings are generally ignored. A part of an intra-group balance etc is not 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 value of the assets 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. The total value of the group’s assets is the sum of the asset value shown in the Financial Statement for G (property rental business) for the relevant accounting period and the asset value 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 assets) 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 asset test on its own account, see GREIT12010 for the details of the Regulations.