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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Capital gains: demerger of property rental business: CTA2010/S558 and 559

The effects of entry to the REIT Regime (CTA2010/S536 and S537) and the provisions for change of use of assets (CTA2010/S555) and disposal of assets by way of trade or following development (CTA2010/S556) do not apply in the event of a demerger (CTA2010/S558 and S559). Where the property rental business assets remain within the REIT regime these provisions are switched off.

Demerger of REIT company assets

CTA2010/S558 provides for the demerger of the REIT company assets. Provision is made where a REIT company (C) disposes of property rental business asset(s) to a subsidiary company (S) and then disposes of S to another company (P). If, on the date of its acquisition of S, P elects to become a UK REIT group, specifying a date within 6 months of C’s original disposal of the assets to S, then

  • the effects of entry to the REIT regime do not apply to the new REIT group in relation to the assets acquired with S. The property rental business of S is not treated as ceasing on entry into the regime and there is no deemed disposal and reacquisition of the assets.
  • the disposal by C to S of the property rental business assets is not treated as a disposal of assets by the property rental business to the residual business. There is no deemed disposal of assets under CTA2010/S555
  • the disposal is not by way of trade and the 3-year development rule (CTA2010/S556(3)) does not apply.

P may give notice electing into the regime even if it does not expect to meet CTA2010/S528 conditions C (admitted to trading on a recognised stock exchange), E (shares are ordinary share capital or non-voting preference shares and there is only one class of ordinary share capital) and F (conditions with regards to loans) throughout its first accounting period. However if these conditions are not met within 6 months of the acquisition of S by P then CTA2010/S558 cannot have effect and the effects of entry (CTA2010/S536 and S537) and the provisions for change of use of assets (CTA2010/S555) and disposal of assets by way of trade or following development (CTA2010/S556) may apply.

Demerger of group REIT

CTA2010/S559 provides for demergers involving Group REITs, where the company (C) with property rental business assets is sold to another Group REIT (G) or where C continues as a Company REIT.

The conditions to be met for a Group REIT demerger are that C or the principal company of G is a UK company and not an open ended investment company (CTA2010/S528(1) and (2)) and C or G, as the case may be,

  • has a property rental business, with at least 3 properties and no single property represents more than 40% of the total value of the properties involved in the property rental business (CTA 2010/S529)
  • meets the distribution of profits condition (CTA2010/S530)
  • meets the balance of business conditions (CTA2010/S531)
  • gives notice, no later than the date C is sold, electing into the REIT regime on the date C leaves the demerged group.

The outcome is that the effects of entry to the REIT regime do not apply to the new REIT group or company, in relation to the assets acquired with C. The property rental business of C is not treated as ceasing on entry into the regime and there is no deemed disposal and reacquisition of the assets. Also the effects of cessation (CTA2010/S579 and S580) do not apply to C, so there is no deemed disposal of the property rental business assets on leaving the demerged group and no ending of C’s accounting period.

C or G may give notice electing into the regime even if it does not expect to meet CTA2010/S528 conditions C (admitted to trading on a recognised stock exchange), E (shares are ordinary share capital or non-voting preference shares and there is only one class of ordinary share capital) and F (conditions with regards to loans) throughout its first accounting period. However if these conditions are not met within 6 months of C leaving the demerged group then CTA2010/S559 cannot have effect and C is treated as having ceased to be a member of the demerged group on the date it left the group.