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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Joint ventures: Joint Venture Look-Through Notice: Tax-exempt business and other conditions

Venturing company

In deciding whether it meets various regime conditions, the venturing company must take account of a portion of the assets, income etc of the joint venture company. The same definitions of property rental business, assets involved, method of valuation etc apply as for a single company UK-REIT meeting the conditions on its own account (see GREIT01020 and GREIT02020).

Tax-exempt business Condition 4

The venturing company must include a relevant portion of the profits of the property rental business of the joint venture company or group in applying the 90% distribution test in section 107 FA 2006. The relevant portion is by reference to the venturing company’s level of beneficial interest in the joint venture company (regulation 6(1) SI 2006/2866 and regulations 10(1) and 22(1) SI2007/3425).

For example, venturing company (V) has 40% of the shares in joint venture company (J). The income of V’s tax-exempt business for year to 31 December 2008 is 1,000 and of J’s property rental business is 500. To meet the 90% distribution requirement, V must distribute at least 1,080 (= 90% of (1,000 + (500 x 40%))) by 31 December 2009 (the CTSA filing for V).

Balance of Business Conditions 1 and 2: Joint venture company

The venturing company must include a relevant portion of the income of the property rental business of the joint venture company in deciding whether it has met the 75/25 income test in section 108(2) FA 2006. The relevant portion is by reference to the venturing company’s level of entitlement to profits from the joint venture company (regulation 6(2) SI 2006/2866 and regulations 10(2) and 20(2) SI2007/3425).

The venturing company must include a relevant portion of the value of the assets involved in the property rental business of the joint venture company in deciding whether it has met the 75/25 asset test in section 108(3) FA 2006. The relevant portion is by reference to the venturing company’s level of entitlement to assets of the joint venture company (regulation 6(3) SI 2006/2866).

For example, venturing company V has 40% of the shares in the joint venture company (j). The fair value of the assets involved in V’s tax-exempt business for year at 1 January 2009 is 12,000 and of in its residual business is 2,000. The fair value of the assets involved in J’s property rental business is 8,000, and in its residual business 7,500. For the 75/25 test, the fair value of the tax-exempt business assets is 15,200 (= 12,000 + 40% of 8,000) and of the other activities 5,000 (= 2,000 + 40% of 7,500). The condition is therefore met as the ratio is 75.2%.

Balance of Business conditions: Joint venture group

The joint venture group taken as a whole must satisfy conditions 1 and 2 of section 108 (Regulation 8 SI2007/3425)

Venturing group

Where the principal company of a Group REIT and a joint venture company give notice for ‘look-through’ treatment to apply, the joint venture company is treated in the same way as a company that becomes a 75%/ effective 51% subsidiary of the group for the purposes of the above conditions. The consequences are set out in regulation 13 SI 2006/2866 and regulations 13 and 23 SI2007/3425.