Explanatory note (accessible version)
Published 18 July 2023
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Clause 1: Real Estate Investment Trusts
Summary
- This clause and Schedule make amendments to the Real Estate Investment Trust (REIT) rules. The changes include amendment of the condition that a REIT is not a close company to ensure the rule works as intended. Further changes also allow insurance companies to hold group REITs and make technical changes to the profit: financing cost ratio, the interaction with the corporate interest restriction, the rule allowing a REIT to hold a single property and the exemption for gains on disposal of UK property rich entities.
Details of the clause
2. Clause 1 introduces Schedule 1.
Details of the Schedule
3. Paragraph 1 states that the Corporation Tax Act (CTA) 2010 is to be amended.
4. Paragraph 2 amends section 528, introducing a requirement that certain institutional investors must meet a general diversity of ownership condition or the non-close condition.
5. Subparagraph (2) of paragraph 2 introduces a new “non-close condition”. This amendment is treated as having always had effect.
6. Subparagraph (4) of paragraph 2 introduces new subsection 528(4C) which defines the “non-close condition”. This amendment is treated as having always had effect.
7. Subparagraph (6) of paragraph 2 introduces new subsections 528(5A) and (5B) which define a direct and indirect participator for the non-close condition. Subsection 6 also introduces new subsection 528(5C) which sets out the rule for attribution of rights where a partnership is involved.
8. Subparagraph (7) of paragraph 2 makes consequential amendments to paragraph 46 of Schedule 5AAA to TCGA 1992. Subparagraphs (8) and (9) of paragraph 2 provide a saving provision to address existing investors who will no longer meet the revised definition of an institutional investor.
9. Paragraph 3 amends section 606 to provide that an insurance company can hold an interest of any size in a REIT group. This amendment has effect from the date of Royal Assent of the Finance Bill.
10. Paragraph 4 amends section 544 so that the property profits for the purpose of the profit: financing-cost ratio are calculated as intended for the property rental business in the United Kingdom. The amendments made by subparagraphs (2) and (3) are to be treated as having always had effect.
11. The amendments made by subparagraph (4) of paragraph 4 have effect for accounting periods ending on or after 1 April 2023.
12. Subparagraph (5) of paragraph 4 removes potential double taxation by excluding from the calculation of property finance costs amounts that would not be allowed in calculating profits in accordance with section 599, except for amounts disallowed under the corporate interest restriction rules.
13. Paragraph 5 amends section 529(2B) so that where a REIT meets the property rental business condition by relying on condition C and then seeks to rely on condition C in relation to a different property, the relevant time for the purposes of valuing the second property is linked to the date of sale of the first property. These amendments have effect from the date of Royal Assent of the Finance Bill.
14. Paragraph 6 amends section 535A so that a reference to the disposal of a right or interest in a company that is UK property rich includes disposal of a right or interest in a co-ownership authorised contractual scheme. This amendment has effect from the date of Royal Assent of the Finance Bill.
15. Paragraph 7 amends section 452 of TIOPA 2010 to ensure the corporate interest restriction calculation correctly takes into account the exempt gains on disposals of rights or interests in companies that are UK property rich by deeming the exemption in section 535A(2) to not apply. These amendments have effect from the date of Royal Assent of the Finance Bill.
Background note
16. A REIT is a company through which investors can invest in real estate indirectly. Specific tax rules for UK REITs were introduced in Finance Act 2006. The regime has proved popular and the number of UK REITs stands at 127 as of June 2023.
17. Subject to meeting the relevant conditions, a company may notify HM Revenue & Customs (HMRC) that it is to be treated as a UK REIT. Its property rental profits and gains are then, in broad terms, treated as exempt from corporation tax, subject to ongoing conditions such as a requirement to distribute 90% of its exempt profits as property income distributions, which are in turn treated as property rental income in investors’ hands.
18. A ‘Review of the UK funds regime: a call for input’ was published on 26 January 2021 with a summary of responses issued on 10 February 2022. As part of this wider review of the UK funds regime, the government considered proposals for further changes to the REIT regime to reduce unnecessary burdens and make the regime more attractive for investment in the UK. Some of these changes were made in Finance Act 2022 and Finance Act 2023. This Schedule brings forward a further tranche of changes.
19. If you have any questions about this change, or comments on the legislation, please contact the REIT policy team at financialservicesbai@hmrc.gov.uk.