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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Background : Group REITs – definition of ‘group’ that can be a group REIT

The exemptions from tax provided by Real Estate Investment Trust legislation can apply only to members of a group of companies as defined in CTA2010/S606.  This definition follows closely the TCGA1992/S170 definition of ‘group of companies’.  It consists of a parent company (referred to as the ‘principal company’ of a Group REIT), its ‘75% subsidiaries’ and their 75% subsidiaries, provided they are all ‘effective 51% subsidiaries’. This can include non-resident companies, so long as the companies meet the 75% and effective 51% subsidiary requirement. The only company that must be UK resident is the principal company.  

Definitions of ‘75% subsidiary’ and ‘effective 51% subsidiary’

The definition of ‘75% subsidiary’ is as set out in CTA2010/S1154(3) (beneficial ownership, directly or indirectly, of 75% or more of the ordinary share capital).  ‘Effective 51% subsidiary’ has the same meaning as given by TCGA1992/S170 (the parent is beneficially entitled to 50% of distributable profits, and would be entitled to 50% of the assets on winding-up).  For more detail on these definitions, see CG45100 onwards. 

Definition of ‘company’

‘Company’ takes the same meaning as set out in TCGA1992/S170 (9), which is broadly a company incorporated under UK or other law, a friendly society and a building society.  Other bodies that are within the charge to corporation tax (such as a sports club or authorised unit trust) do not come within this definition.  Whether or not account is taken of their activities, assets and income for the various regime tests and conditions will depend on the nature of the body – see IFM29010 for more detail. 

Membership of more than one group

Other than in certain limited circumstances, a company cannot be a member of more than one Group REIT.  The exception to this is where the company is the vehicle used to carry on a joint venture, and the principal company has made a ‘Joint Venture Look-Through’ election (see IFM30015) in respect of its interest in the company.

Other entities that are part of commercial group

Members of the group may have less than 75% interests in other companies and interests in vehicles that are not companies, such as LLPs and unit trusts.  This does not prevent the group from being a Group REIT, but the tax-exemption and other rules that apply to companies that are members of the group as defined, do not apply to these other companies and may not apply to other vehicles, depending on its legal nature.   

Excluded companies

Regardless of the percentage interest held in them, certain types of company are not allowed to be part of a Group REIT, either as the principal company or as a member of the group.  These are:

·       insurance companies (as defined in FA2012/S65),

·       a subsidiary of an insurance company (company in which 75% or more of the shares are held by one or more insurance companies), and

·       open-ended investment companies.  

Note that this reference to ‘open-ended investment company’ is not restricted just to those that fall within the section 236 Financial Services and Markets Act 2000 definition. 

If members of the group have interests in excluded companies, then the interest is treated as an asset of the residual or non-ring fence business of the group and any dividend arising from the shares is residual income.

Company that is not a ‘75% subsidiary’ or an ‘effective 51% subsidiary’ 

Members of the group may have insufficient interest in a company for it to be a 75% / effective 51% subsidiary.  Again, the group can be a Group REIT, but the group’s interest in the company is treated as an asset of the residual or non-ring fence business of the group and any dividends arising from the shares are residual income.  This is regardless of the nature of the activities carried on by the company. 

The exception to this rule is where the company is a joint venture for which a Look-Through election has been made.  These can be made where the Group REIT owns 40% or more of the company and the company itself carries on mainly property rental business (see IFM30015).   

Other vehicles

Having interests in other types of vehicle does not prevent a group of companies that otherwise meets the definition in CTA 2010/S606 from being a Group REIT.  How the interest in the vehicle and the underlying income and assets are treated depends on the nature of the vehicle – see IFM29010.