IFM27055 - Real Estate Investment Trust : Breaches of conditions: Balance of business Conditions: CTA2010/S568

Two conditions of the regime relate to the amount of qualifying property rental business carried on by the UK-REIT compared with non-qualifying business.  There are no additional tax charges as a result of breaching either condition, but if they are broken by too much or for too long, the regime may cease to apply.  This is set out in CTA2010/S568 and applies after the first accounting period the REIT is within CTA 2010/Part 12.  HMRC may issue a Notice of Termination under CTA2010/S572 if either of the Balance of business conditions are not met in three successive accounting periods or there have been 3 or more breaches in a 10 year period (CTA2010/S576).

Breaching the income test

The income arising from the property rental business of a single company UK-REIT or a Group REIT must be at least 75% of the total income of the group or company (Balance of business Condition A – see IFM22070 for detail).  This test applies to the accounting period as a whole. 

If the UK-REIT fails the income test for an accounting period, the company or group may remain in the regime provided the income of the property rental business has not fallen below 50% of the total for the accounting period.  If it falls below 50%, the breach is regarded as serious – see IFM27060.    

The income of the property rental business can remain between 50% and 75% of the total for the following accounting period without triggering termination of the regime. 

Remaining below 75% but above 50% for two consecutive accounting periods counts as a single occasion on which CTA2010/S568(1) is relied upon to remain in the regime. 

Breaching the asset test

The other Balance of business Condition is that 75% of the assets of the company or group must be involved in the property rental business (Balance of Business Condition B – see IFM22075 for detail).  This test must be met at the start of each accounting period.

If the test is failed in relation to the first accounting period but is met at the beginning of the second accounting period then the breach is ignored. CTA2010/S566. 

If the UK-REIT fails this test at the start of an accounting period, the company or group may remain in the regime provided the value of the assets involved in the property rental business has not fallen below 50% of the total at that date.  If it falls below 50%, the breach is regarded as serious – see IFM27060.    

The value of the assets involved in the property rental business can remain between 50% and 75% of the total at the start of the following accounting period without triggering termination of the regime. 

Remaining below 75% but above 50% at the start of two consecutive accounting periods counts as a single occasion on which CTA2010/S568(2) is relied upon to remain in the regime.