IFM22016 - Real Estate Investment Trust : Conditions And Tests: Company Conditions: Condition D: Institutional Investors: CTA2010/S528(4A)

The list of institutional investors is given at CTA2010/S528(4A) and includes the following persons (some of which are required to themselves meet a non-close or Genuine Diversity of Ownership (GDO) condition with effect from 22 February 2024 – see further below):

(a)        the trustee or manager of—

(i)         an authorised unit trust scheme (as defined in FISMA2000/S237(3)), or

(ii)        a unit trust scheme (as defined in FISMA 2000/S237(1) which is authorised under the law of a territory outside the United Kingdom in a way which makes it, under that law, the equivalent of an authorised unit trust scheme (as defined in FISMA 2000/S237(3));

(b)        a company—

(i)         which is an open-ended investment company (as defined in FISMA 2000/S236(1)) incorporated by virtue of regulations under FISMA 2000/S262, or

(ii)        which is incorporated under the law of a territory outside the United Kingdom and is, under that law, the equivalent of an open-ended investment company (as defined in FISMA 2000/S236(1));

(ba)     a person acting on behalf of an authorised contractual scheme (as defined in FISMA2000/S237(3)) which is a co-ownership scheme (as defined in FISMA2000/S235A);

(bb)     a person acting on behalf of a Reserved Investor Fund (Contractual Scheme) (within the meaning of section 20 to F(No.2)A 2024);

(c)        a person acting on behalf of a limited partnership which is a collective investment scheme (as defined in FISMA 2000/S235 );

(d)        the trustee or manager of a pension scheme (as defined in FA2004/S150(1));

(e)        a person acting in the course of a long-term insurance business (that is, the activity of effecting or carrying out contracts of long-term insurance within the meaning of the Financial Services and Markets (Regulated Activities) Order 2001 (S.I. 2001/544)) who—

(i)         is authorised under FISMA 2000 to carry on such business, or

(ii)        has an equivalent authorisation under the law of a territory outside the United Kingdom to carry on such business;

(f)         a charity; (see FA2010/Sch6 Part 1 for the definition of a charity)

(g)        a person registered under any of the following provisions (which provide for registers of social landlords)—

(i)         in England, section 111 of the Housing and Regeneration Act 2008;

(ii)        in Scotland, section 20 of the Housing (Scotland) Act 2010 (asp 17);

(iii)       in Wales, section 1 of the Housing Act 1996;

(iv)       in Northern Ireland, Article 14 of the Housing (Northern Ireland) Order 1992 (S.I. 1992/1725 (N.I. 15));

(h)        a person who cannot be liable for corporation tax or income tax (as relevant) on the ground of sovereign immunity;

(i)        a UK REIT;

(j)         a person who is resident in a territory outside the United Kingdom in accordance with the law of that territory relating to taxation and is, the equivalent of a UK REIT (see below)


Requirement for certain institutional investor to be widely held

Investors within (a), (b), (ba), (bb) and (c) will, however, only qualify as an institutional investor to the extent that they themselves would not, if they were a company, be ‘close’ (with no institutional investor carve out applying for these purposes) or alternatively satisfy the genuine diversity of ownership (GDO) condition in CTA2010/s528ZB(2). For further information on the GDO condition, see IFM17000+.

In addition, a person acting in the course of a long-term insurance business within (e) will only qualify as an institutional investor to the extent that they themselves would not, if they were a company, be ‘close’. For these purposes only, CTA2010/S444 applies such that a person controlled by a non-close company will not be treated as close.

Commencement and legacy entities

The application of the non-close condition and GDO condition to certain entities in the institutional investor list was introduced by Finance Act 2024 with effect from 22 February 2024.

Interests held by existing investors who met the definition of institutional investor before 22 February 2024 but would not do so under the amended legislation (‘legacy entities’) can continue to be treated as institutional investors (including where this is relevant to “qualifying investors” for the purposes of any provision in TCGA92/SCH5AAA) in relation to the interests in the company/principal company held by them on 22 February 2024, subject to the conditions below (Finance Act 2024/SCH7/PARA5).

This legacy entity treatment remains applicable for as long as the following two conditions are met:

  • The legacy entity’s proportionate interest does not increase as a result of the acquisition by the entity of further interests in the company. This condition would not be breached where the legacy entity acquires additional interests without its proportionate interest changing (such as on a rights issue taken up by all investors) or where although the legacy entity’s proportionate interest does increase that is due to factors outside of its control (for example, due to another investor redeeming its interest).
  • The fact that the legacy entity is an institutional investor continuously remains relevant either for the purpose of satisfying the REIT conditions for entry into or remaining in the REIT regime or, where this is relevant to qualifying investors, for the purpose of any provision of TCGA92/SCH5AAA. For example, if the composition of the rest of the investor base changes such that a REIT no longer has to rely on that legacy entity being an institutional investor in order to satisfy Condition D, the legacy entity treatment will cease to be available in relation to that REIT from that point onwards.

Limited partnerships and pension schemes with legal personality

The statutory list of institutional investors in CTA2010/S528(4A) refers to ‘a person acting on behalf of’ a limited partnership or authorised contractual scheme. This is because such investors generally do not have legal personality of their own, but rather act through their general partner or operator (as applicable). The same applies in the case of a pension scheme, which generally acts through its manager or trustee.

However, in some cases, a limited partnership or pension scheme may have its own legal personality, such that it is the partnership or scheme itself which holds the shares in the underlying REIT, rather than its general partner or manager/trustee. For example, this would be the case for a Scottish limited partnership, Such limited partnerships and pension schemes will be institutional investors in their own right provided they meet the relevant conditions in (c) or (d).

For details on the application of the ‘institutional investor carve out’, see IFM22017.

Overseas equivalent of UK REIT

The purpose of CTA2010/S528(4A)(j) is to ensure that an entity which is tax resident in a jurisdiction outside the UK is treated as an institutional investor where, in practice, it is broadly equivalent to a UK REIT.

Prior to April 2022, it was necessary to consider whether the relevant overseas REIT regime as a whole was equivalent to the UK REIT regime. This requirement was amended by Finance Act 2022. It is now only necessary to assess whether the particular overseas entity itself is broadly equivalent to a UK REIT.

An overseas entity need not satisfy each of the strict criteria in CTA2010/Part 12 in order to be considered to be equivalent. HMRC will accept that an entity is equivalent to a UK REIT where it has the characteristics set out in the OECD Commentary to Article 10 of the Model Tax Convention (with no further requirement to consider any of the detailed UK REIT regime rules in CTA2010/Part 12):

  1. A widely held company, trust or contractual or fiduciary arrangement. To meet this requirement, the overseas entity should be genuinely widely held by unconnected investors as opposed to a captive or closely held entity. While this doesn’t need to precisely mirror meeting the UK “non-close condition” in CTA2010/S528(4), HMRC will accept that an entity would meet this requirement where, assuming it was a UK company, it would meet that “non-close condition” (see IFM22015 and IFM22017).
  2. Derives its income primarily from long-term investment in immovable property. The majority of the overseas entity’s profits and assets must relate to long-term investment in immovable property.
  3. Distributes most of that income annually. The overseas entity should adhere to a distribution policy which requires the majority of its property income to be distributed at least annually. As for the UK REIT regime this does not necessarily need to be within the same financial year the income accrued.
  4. Does not pay income tax on the income related to immovable property that is so distributed. To meet this requirement, the overseas entity should not be subject to tax on the income received from its long-term investments in immovable property to the extent it is distributed (this could be by way of either an exemption of the relevant income, or a deduction for the amounts distributed; different REIT regimes take different approaches). This is not intended to apply where the entity is simply not taxable on property income in the overseas jurisdiction because tax is not generally applied to that income at all. It only applies where the entity does not pay income tax on this income under the terms of a specific REIT (or equivalent) regime as this achieves the position set out in the OECD commentary that the REIT does not pay tax on the income as a result of tax rules that provide for a single-level of taxation in the hands of the investors in the REIT.

Whether an entity has these characteristics is a question of fact which should be assessed by customers on a case-by-case basis to confirm that the entity is, and remains the overseas equivalent of a UK REIT where this is relevant. As set out in the general guidance for the non-statutory clearance service, HMRC will not provide clearances on questions of fact.