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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Property rental income: capital allowances: general: CTA2010/S537

The tax-exempt income of the property rental business is based on the computation of profits for the purposes of taxing a property business. One element in arriving at the profit for these purposes is capital allowances. A company may make a claim for capital allowances it wants to deduct in the period (CAA2001/S3(1)). 

The CAA2001/S3(1) election or requirement to claim and the choice of how much to claim are set aside in calculating the income of the tax-exempt property rental business (CTA2010/S599(8)). Instead, the maximum capital allowances available under CAA2001 must be taken into account in the calculation of the profits of the property rental business. This will have the effect of reducing profits and the property income distribution to, and the tax liability of, the shareholders.

This means that a capital allowances ‘shadow’ regime operates within the property rental business. 

Apart from some modifications when the company joins or leaves the regime, and when assets move between the property rental and residual businesses (see IFM24015), all the normal capital allowance rules apply to the property rental business. For more information see the Capital Allowances Manual. 

Opening and closing book values

When a company joins the regime, the property rental business takes over the capital allowance position of the company’s property rental business as at the end of the accounting period before it joined, as set out in CTA2010/S537. This is on a ‘stand-in-shoes’ basis, at values that result in no balancing charge or allowance arising to the company, and provides the opening values for property rental business assets on which ‘shadow’ capital allowances must be calculated. 

This specification of the transfer values in CTA2010/S537 means that CAA2001/S198 and S199 elections cannot be made on entry to the regime.

Similarly, when a company leaves the regime CTA2010/S580 applies and there is a deemed sale and reacquisition such that no balancing charges or allowances arise. Again no elections can be made under CAA 2001/S198 and S199 on exit from the regime.

Dual purpose assets

If plant or machinery is used partly for the purposes of the property rental business and partly for other activities, the qualifying expenditure should be apportioned between the two on a just and reasonable basis. This follows partly from the concept within the UK-REIT regime of references to assets being also references to part of an asset (CTA2010/S608(1)) and partly from CTA2010/S599(7), which apportions dual-purpose expenditure on a just and reasonable basis. 

Other activities of the company

There are no special capital allowances rules that apply to the residual part of the company. When the company joins or exits the regime, there is no deemed sale and reacquisition of residual business assets, and thus no special rules to determine carry forward etc values.

Enhanced Capital Allowances

A REIT company can claim enhanced capital allowances but is not able to claim the enhanced capital allowances credit.

Land Remediation Relief

A REIT company is able to claim Land Remediation relief and Land Remediation tax credit. See the Corporate Intangibles and Research & Development manual [The tax-exempt income of the property rental business is based on the computation of profits for the purposes of taxing a property business. One element in arriving at the profit for these purposes is capital allowances. A company may make a claim for capital allowances it wants to deduct in the period (CAA2001/S3(1)). 

The CAA2001/S3(1) election or requirement to claim and the choice of how much to claim are set aside in calculating the income of the tax-exempt property rental business (CTA2010/S599(8)). Instead, the maximum capital allowances available under CAA2001 must be taken into account in the calculation of the profits of the property rental business. This will have the effect of reducing profits and the property income distribution to, and the tax liability of, the shareholders.

This means that a capital allowances ‘shadow’ regime operates within the property rental business. 

Apart from some modifications when the company joins or leaves the regime, and when assets move between the property rental and residual businesses (see IFM24015), all the normal capital allowance rules apply to the property rental business. For more information see the Capital Allowances Manual. 

Opening and closing book values

When a company joins the regime, the property rental business takes over the capital allowance position of the company’s property rental business as at the end of the accounting period before it joined, as set out in CTA2010/S537. This is on a ‘stand-in-shoes’ basis, at values that result in no balancing charge or allowance arising to the company, and provides the opening values for property rental business assets on which ‘shadow’ capital allowances must be calculated. 

This specification of the transfer values in CTA2010/S537 means that CAA2001/S198 and S199 elections cannot be made on entry to the regime.

Similarly, when a company leaves the regime CTA2010/S580 applies and there is a deemed sale and reacquisition such that no balancing charges or allowances arise. Again no elections can be made under CAA 2001/S198 and S199 on exit from the regime.

Dual purpose assets

If plant or machinery is used partly for the purposes of the property rental business and partly for other activities, the qualifying expenditure should be apportioned between the two on a just and reasonable basis. This follows partly from the concept within the UK-REIT regime of references to assets being also references to part of an asset (CTA2010/S608(1)) and partly from CTA2010/S599(7), which apportions dual-purpose expenditure on a just and reasonable basis. 

Other activities of the company

There are no special capital allowances rules that apply to the residual part of the company. When the company joins or exits the regime, there is no deemed sale and reacquisition of residual business assets, and thus no special rules to determine carry forward etc values.

Enhanced Capital Allowances

A REIT company can claim enhanced capital allowances but is not able to claim the enhanced capital allowances credit.

Land Remediation Relief

A REIT company is able to claim Land Remediation relief and Land Remediation tax credit. See the Corporate Intangibles and Research & Development manual](https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird60000) onwards for the conditions to be met for the relief and credit.

Group REITs

These rules apply to each member of a Group REIT to the extent that it carries on a qualifying property rental business.