IFM27020 - Real Estate Investment Trust : Breaches of conditions: Company Condition D ('not close'): actions of others: CTA2010/S562A(6)

A company can become close as a result of the action of its shareholders.  Where this is a consequence of a take-over bid, special rules may apply (see IFM27015).   Note that during the course of a take-over, it is likely that the board of the target will at some stage recommend shareholders accept the offer.  Although this recommendation is the action of the company, the event that triggers the breach of conditions D is the action of the company making the bid to take over the UK-REIT, and the take-over and action of others rules would apply to decide if or when the company or group ceased to be a UK-REIT. This will also be true where a takeover is effected by way of a scheme of arrangement.

A company may also become close when, for example, one shareholder increases their holding so that they and four others control the company, or where two previously unconnected participants become connected and attribution rules result in control by five or fewer shareholders, and the remaining shares fail the quoted company test (CTA2010/S446, amended for UK-REITs by CTA2010/S528(5)).  The company would therefore fail company condition D at the date it becomes ‘close’, and the regime would cease to apply with effect from the end of the previous accounting period (CTA2010/S562A(4)). 

Note that ‘close’ is more strictly defined for the purposes of UK-REITS than it is in general tax legislation– see IFM22010.

If the company becomes close as a result of the action of others, then the regime can continue to apply to the company provided the breach is remedied and the company is non-close by the end of the following accounting period – CTA2010/S562A(6).   

Breaches of Company Condition D as a result of the action of others (other than take-over by another REIT) count towards the number of times conditions can be breached before HMRC consider whether to give notice that the REIT regime ceases to apply (CTA2010/S577).  

Example  

C is a UK-REIT and makes up its accounts to 31 December.  Five shareholders S1 to S5 each own 9% of the ordinary share capital (OSC) of C.  None of the other shareholders owns more than 4%.  S1 (a listed company) acquires an additional 21% on 30 June 2016.  On that date, C becomes close since S1, S2, S3, S4, and S5 together own 66% of the OSC of C.  Company Condition D is breached on 30 June 2016. 

On 1 December 2017, S1 sells its entire holding of C shares so that the company is no longer close.  The breach is therefore remedied before the end of the following accounting period and C remains in the regime throughout. 

If S1 delays selling its shares until 1 February 2018, the breach is not remedied in time and the regime ceases to apply to C on 31 December 2015.