IFM21045 - Real Estate Investment Trust : Background: Creating the Ring Fence

The concept of the ring fence is fundamental to the operation of the UK-REIT regime, and is described in IFM21015.

IFM21040 contains descriptions of parts of the company/group by reference to before joining the regime, (pre- entry group or company), while in the regime (when the company/group has separate property rental business and residual business and after leaving the regime (post-cessation group or company). CTA 2010/S541 uses these terms to deem these parts to be carrying on separate businesses and to be separate companies or groups.

Separate business - CTA 2010/S541 (1) and (2)

The property rental business of the company/group is deemed to be a separate business, distinct from the business carried on by the company/group pre-entry, the residual business of the company/group and the post cessation business of the company/group. This deeming does not however treat the non-property rental activities carried on by the company before, during and after it is in the regime as separate businesses. That is, the activities of the company/group pre-entry, the residual business of the company/group and the post cessation business of the company/group are not treated as separate businesses as a result of CTA 2010/S541 (1) and (2).

Separate companies - CTA 2010/541(1) and (3)

In a similar way, for the purposes of CT, the company/group so far as it carries on property rental business is deemed to be a separate company/group, distinct from the pre entry company/group, the residual company/group and the post cessation company/group.. This deeming does not however treat the company/group so far as it carries on residual business before, during and after it is in the regime as separate companies for CT purposes.

Consequences of deeming the property rental business as a separate business/ separate company/group

While the company is in the regime, the effect of this deeming is that losses incurred as a result of activities of the property rental business cannot be offset against profits generated by the residual business of the company/group, either in the same or different accounting periods.

The same applies in reverse - losses arising in the residual business cannot be used to reduce the measure of profits of the property rental business. This may seem an odd activity to prohibit, since the profits of the property rental business are exempt from CT. However, as the CT measure of those profits is used to determine the minimum distribution requirement, attempting to reduce the profits of the property rental business would reduce that requirement.

This restriction on use of losses applies also to any other deficit, expense or allowance that might otherwise be available to reduce the measure of profits for CT purposes (CTA2010/S541 (6)). The legislation does not list specific expenses, allowances etc. and the term therefore covers all kinds of items, such as capital allowances, loan relationship deficits and excess management expenses.

For the consequences for losses etc. when a company joins or leaves the regime, see IFM23105 and IFM26013 respectively.