IFM23015 - Real Estate Investment Trust : Entry to the regime: effects of entry: cessation of business and accounting period: CTA2010/S536

On joining the regime, a line is drawn between the property rental activities of the REIT before entering the regime (pre-entry company/group as set out in CTA 2010/S607) and those that are carried on and exempt from tax while the REIT is within the regime. This is done in two ways: one is to deem the pre-REIT property business of the company to cease for tax purposes; the other is to cause the accounting period of a REIT company or a company member of a REIT group to come to an end for CT purposes on joining the regime.

Where a company joins the group after the section 523 notice comes into effect, the same rules apply to the business, accounting periods and assets owned by the new group member.

Cessation of pre-REIT property business

At entry, the UK and overseas property businesses of UK companies and the UK property businesses of non-UK companies are treated as ceasing (CTA 2010/S536). The property business carried on by the REIT once it has joined the regime is therefore a newly set up and commenced business for tax purposes. CTA 2010/S519 defines a property rental business for the purposes of the REIT legislation. This deemed cessation does not however apply to the other activities carried on by the company which are defined in CTA 2010/S522 as the residual business. When a company/principal company leaves the REIT regime the activities are referred to as the business of the post cessation company/group as in CTA 2010/S607.

Effect of cessation on losses

Losses etc relating to the property businesses pre-entry cannot be carried forward for use in working out the profits of the property rental business. Neither can losses arising in the post-entry property rental business be carried back to reduce profits of the pre-entry business.

To the extent that the company carried on activities other than property rental, these are regarded as a business that carries on uninterrupted, before, during and after the company is in the regime. If the company had a trading loss in the final accounting period before it joins the regime, that loss can be carried forward in the normal way and used against profits of the trade as carried on by the residual business of the company after the company has joined the regime – see IFM23105.

If the company has unused capital losses, even if they arose on pre-entry disposals of rental property, they can be carried forward and used to reduce chargeable gains that may arise to the residual company/group or the post cessation company/group. See IFM23100.

One accounting period ends/ new one begins – CTA2010/S536(5)

When a single company or a member of a group joins the REIT regime, an accounting period of that company comes to an end. This is the final accounting period for that pre-entry company. A new accounting period starts on the first day the REIT regime applies to the company. This is the first accounting period of that company’s property rental business and its residual business. This requirement applies for UK members of a group joining the REIT regime and for non-UK members carrying on a UK property rental business.

Note that ‘accounting period’ is a term used for computing profits and assessing CT, and is defined in CTA2009/S9 and S10. It is not necessarily the same period as the interval between two accounting dates. Although an ‘accounting period’ always comes to an end on an accounting date, there are several occasions when a new accounting period starts between two accounting dates. The requirement for a new accounting period to begin applies only for CT purposes: there is no requirement that the company changes the date to which it draws up its accounts to reflect the new accounting period for CT purposes.

Corporation Tax returns

REIT group companies and single company REITs are required to make corporation tax returns. However where there is no residual income in a group member company, other than the principal company, then there is no requirement for that member to make a return. If any liability subsequently arises the company has an obligation to notify chargeability under FA1998/Sch 18/Para 2 and returns will subsequently be required. If a company requires a tax reference (for example for a CAA2001/S198 election on a third party sale) it can request one.

The principal company of a group REIT and the single company REIT will be required to complete two tax returns, one for the property rental business and one for the residual business. The company will have two unique tax references for this purpose. Where there is no residual income this will be a nil return.

For the avoidance of doubt property rental profits should not be reported in a residual company’s tax return, Box 169 of the CT600 tax return (Ring fence profits) does not refer to REITs and should be left blank. The property rental profits are shown in the financial statements which are provided at the same time as making its property rental business return. (SI2006/2865/Reg 13)(see IFM22300)