IFM21080 - Real Estate Investment Trust : Background : Group REITs: non-resident group members: UK property rental business

Where the UK property rental business of a non-resident subsidiary of a Group REIT is not excluded from the definition of tax-exempt business by Section 604 and 605 exclusions, the company is exempt from UK tax on the rental income. The gains on disposal of any property used in such a business are also exempt from UK tax.

General case

If a non-UK resident company owns UK property, unless it is effectively connected with a trade carried on through a UK permanent establishment, the rent is chargeable to income tax under ITTOIA2005/Part 3/Chapter 3. The gains on such property, disposed of before 6 April 2019, would not normally be chargeable to capital gains tax, being owned by a non-resident. From 6 April 2019 gains on disposals of UK land by non-residents are chargeable to UK tax.

By a rather circuitous route, the income from UK property owned by a non-resident subsidiary of a Group REIT is exempt from UK tax. This is done in a number of steps.

· The UK property rental business of the non-resident subsidiary is deemed to be within the charge to corporation tax for the purposes of CTA 2010/Part 12 (CTA 2010/S520(3)(a)).

· The profits of the UK property rental business of the non-resident subsidiary are exempt from corporation tax by CTA2010/S534 (2).

· The capital gains profits of the property rental business of the non-resident subsidiary are exempt from corporation tax by CTA2010/S535 (8).

· The profits of the property rental business are exempted from income tax (CTA 2010/S520 (3)(b)).

The profits of the UK property rental business of the non-resident subsidiary are fed into the rules that apply to profits of the property rental business of the UK resident members of the group by CTA 2010/S519(4) and S520(1). This includes the 90% distribution requirement, the requirement to distribute under deduction of basic rate income tax and the rules for administering the deduction at source requirement.

The profits of the UK property rental business of the non-resident subsidiary are reflected in the financial statement under CTA2010/S532(2)(b).

The Non Resident Landlord Scheme does not apply to the rents, since section 520(3)(b) CTA 2010 removes the charge to income tax.

Property effectively connected to trade of UK permanent establishment

If the non-UK resident company owns UK property, and it is effectively connected with a trade carried on through a UK permanent establishment, the rent is chargeable to corporation tax as property income, and the gains on such property would be chargeable to corporation tax.

This property rental business automatically falls within the CTA 2010/S519 definition of property rental business, and the profits count towards the 90% distribution requirement. As the profits and gains are chargeable to corporation tax, the exemptions provided in CTA 2010/S534 and S535 apply anyway.