IFM22015 - Real Estate Investment Trust : Conditions And Tests: Company Conditions: Conditions D-F: CTA2010/S528(4) - (9)

The conditions for joining the REIT regime are set out in CTA2010/S528.

The company/ principal company must meet conditions E - F throughout every accounting period that it is a UK-REIT. They are set out section CTA2010/S528(4) to(9) . If the company/ principal company fails to meet Conditions E or F at any time, this results in automatic termination of the regime for the REIT (CTA2010/S578). In some circumstances, failure to meet Condition D (not a close company) will not result in automatic termination (see IFM27015 and IFM27020).

Company Condition D - not a close company

This condition is that the company/ principal company must not be ‘close’, or it is ‘close’ only because it has a participator that is an institutional investor.

The close company rules are given at CTA2010/Part 10 (CTM60000 onwards). The definition of ‘close’ for this purpose is as set out in CTA2010/S439 with one difference - where the rules in CTA2010/S444 and S447(1)(a) would allow a company to be ‘not close’, where it is controlled by a company that is not close, or meets the quoted company rule by inclusion of a non-close company holding. In these circumstances the company will be treated as ‘close’ for the purposes of this condition. This effectively prevents a UK-REIT from being a subsidiary of a listed company.

The list of institutional investors is given at CTA2010/S528(4A) (see IFM22016). HM Treasury has the power to change this list in regulations. The institutional investor must be a participator within the meaning given by CTA2010/S454 (see CTM60107).

Meeting condition D is not a requirement for giving notice under CTA2010/S523 or S524. (CTA2010/S525) (see IFM23010 for the contents of the notice).

Furthermore condition D does not have to be met for the first three years the company/group is within the regime (CTA2010/S527(4)-(8)). If an accounting period ends in the 3 years following the date specified in the notice electing into the regime then condition D does not need to be met. If the end of the 3 year period falls during an accounting period then condition D only needs to be met in the part of the accounting period that falls after the end of the 3 year period.

However where a company C, did not meet condition D for a time during the first 3 year period, transfers its business to another company X then X is treated as if it stood in the shoes of C so that X is treated as having benefited from the relaxation of condition D for that time. This also applies to any subsequent companies taking on the transferred business. (CTA2010/S573A)

Company Condition E - classes of shares

This condition limits the types of shares the company/ principal company may have in issue. The company may issue ordinary share capital and non-voting restricted preference shares. The company/ principal company is further restricted by not being allowed to issue more than one class of ordinary share capital. A REIT can issue non-voting fixed rate preference shares that are convertible into its ordinary shares.

‘Ordinary share capital’ takes its meaning as set out in CTA2010/S1119

‘Restricted preference share’ takes its meaning from CTA2010/S160 or would do so but for the fact that it carries a right of conversion into shares or securities in the company. The shares must be within the normal CTA2010/S160 (2) to (7) definition of ‘restricted preference share’, and should either carry no voting rights at general meetings or only carry rights which are contingent on the non-payment of a dividend and which have not become exercisable up to the date of payment of a dividend. For more detail, see INTM653050.

Company Condition F - prohibited types of loan

Company Condition F restricts the ways in which the company/ principal company can borrow money. The company/ principal company cannot borrow under terms that entitle the lender to interest which depends on the results of the company’s/ principal company’s business, the value of the company’s/ principal company’s assets or is in excess of market rates or which entitles the recipient to receive an excess return on repayment.

The wording in CTA2010/S528(8) is similar to the definition of ‘normal commercial loan’ in section 162(1)-(5). The main difference is that the CTA2010/S528(8) definition does not refer to convertible loans, which means that a UK-REIT can issue convertible debt, provided that conversion is into the single class of ordinary share or into relevant preference shares that the company is permitted to issue under Company Condition E. CTA2010/S528(9) provides that a loan will not fall within Company Condition F where the interest rate reduces as the company’s business profits increase or where it increases as the company’s business profits decrease. For guidance on interpretation of ‘normal commercial loan’ as defined in CTA2010/S162, see CTM81010.