Real Estate Investment Trust : Entry to the regime: effects of entry: deemed sale and reacquisition of assets: CTA2010/S536
When a company / member of a group joins the REIT regime the property rental business of that company is treated as ceasing on the day before it joins. The assets that were involved in the company’s pre-entry property rental business are treated as though they had been disposed of and reacquired immediately after entry to the regime by the company’s property rental business (CTA 2010/S536(2)). Group members that do not carry on property rental business are not affected by these rules.
Asset involved in the property rental business
For the purposes of the deemed sale and reacquisition an asset is involved in the property rental business if it would be a property involved in the property rental business condition in CTA 2010/S529(4)– see IFM22020.
This means that the only assets that are sold and reacquired are those that are an estate, interest or right by the exploitation of which the property rental business is conducted. It also means that the same definition of ‘property rental business’ (see IFM21020) applies before and after a company joins the REIT regime. In other words, the assets that are deemed to be sold and reacquired are only those UK and overseas properties that will be involved in the property rental business of the REIT company once the regime applies. As a result, overseas properties of non-UK group companies are not treated as sold and reacquired.
Sales and purchases close to the date of entry
Where the purchase is being made under an unconditional contract, the property will be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 523 or 524 notice.
Where a sale is being made under an unconditional contract, the property will not be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 523 or 524 notice.
For sales and purchases, the later date when the property is conveyed or transferred to the purchaser is not relevant.
If the contract is conditional, the date of acquisition or disposal is the date all of the conditions are satisfied. For more detail on conditional contracts, see CG14270.
The deemed disposal of assets takes place at market value, which takes the same meaning as it does for the purposes of TCGA (CTA 2010/S609). This is the price that the assets might reasonably be expected to fetch on a sale in the open market with a willing buyer and seller negotiating on the basis of full information (see CG16330).
If the deemed sale and reacquisition would result in a gain for a company which is joining the REIT regime, this is not a chargeable gain for TCGA purposes (CTA 2010/S536(4)). If the result is a loss, that loss is not allowable for TCGA purposes.
A Company / principal company of a group that joins the regime has to be admitted to trading on a recognised stock exchange. UK listed companies will be following RICS (Royal Institute of Chartered Surveyors) guidelines in valuing the properties on their books, and valuations will therefore be professional and recent. As a rule of thumb, values shown in the published accounts should be a reliable starting point for determining market value for this purpose. For guidance on valuing property, see CG74000 onwards.
For interactions of commencement provisions and capital gains claims and elections that can be made, see IFM23100.
For capital allowance purposes, the transfer takes place at tax written-down value such that no balancing charges or allowances arise to the company which joins the REIT regime. The effect of this is that the company’s property rental business in the regime takes over the capital allowance position of the company’s property rental business before joining the regime.
For interactions of commencement provisions and capital allowances claims and elections that can be made, see IFM23105.
Note that although the company’s property rental business will not be liable to CT on the profits of its property rental business it must calculate a ‘shadow’ capital allowance claim in order to determine the amount of profits which it must distribute (see IFM24010 for details).
Where a member of the group is not 100% owned by the principal company or other group members, the deemed sale and reacquisition rules apply to only a portion of the assets of the company (CTA 2010/S536(6)). The portion taken into account is what is left after disregarding the percentage of the assets that are excluded from the financial statements as set out in CTA 2010/S533(3). This is a percentage equal to the beneficial interest in the company held by non-members of the group.
For example, 80% of the ordinary share capital of company S is owned by members of Group REIT G. Before G joins the regime, S owns and rents out one property with market value at the date of entry of 1,000 and base cost for capital gains purposes of 800. S sells the property for 1,500 two years after G joined the regime.
S (pre-entry) is deemed to sell and repurchase 80/100 of the property. The gain at entry of 160 (= 1,000 x 80/100 – 800 x 80/100) is ignored for tax purposes. The gain on the part of the asset that is within the tax-exempt business of S post-entry is tax-exempt. The taxable gain (ignoring indexation) on the part of the asset that is in the residual business of S post-entry is 140 (= 1,500 x 20/100 – 800 x 20/100).
Non-resident group members
Although the modifications set out above apply to UK resident members of the group, the same consequences flow for non-resident group members. There is no need to deem a new accounting period to begin because this happens anyway under CTA2009/S9, as the company so far as it carries on UK property rental business, comes within the charge to CT (CTA 2010/SS520(3)) for the first time.