IFM22075 - Real Estate Investment Trust : Conditions and Tests: Balance of business Conditions: Condition B (asset test) (CTA2010/S531(5)-(9))
The asset test applies to the assets of the company or group. At the start of each accounting period, at least 75% of the assets of the company or group must be involved in the property rental business or be cash or shares held in other UK REITs (CTA 2010/S531(5)). In some cases, a REIT can fail this test but remain in the regime – see IFM27005.
For company REIT purposes the classification of “assets involved in the property rental business” means those separate items that would be classified as assets for accountancy purposes if separate financial accounts were produced for the property rental business, not solely assets that produce rent. For Group REITs the assets are those included in the financial statement under CTA 2010/S532(2)(a). Note that the definition of property rental business for this purpose is not restricted to the property rental business that is exempt from tax as a result of the application of the UK-REIT legislation, it includes the worldwide property rental business.
The total value of the group’s assets is the sum of the asset value shown in the Financial Statements under CTA2010/S532(2)(a) and (c) for the relevant accounting period.
Valuation of assets
The assets are valued using IAS, but no account is taken of liabilities secured either generally or specifically against any of the assets. If IAS offers a choice between cost basis and fair value, fair value must be used.
See IFM22040 for more detail.
Property under development
A REIT may acquire land or property and spend time developing it. Provided the intention is for the building to be retained as an investment property, the value of the land/ property is included in the assets of the property rental business even though no rental income has been generated by the property during the development period.
Void periods
Even though a property may be generating no rental income for a period, it will still count as an asset of the property rental business provided the intention is to retain it as an investment property and re-let it.
Group REITs - Intra-group balances
Intra-group balances and holdings are ignored to the extent they are referable to the REIT’s interest. The amount that is not ignored is the percentage represented by the beneficial interest in the subsidiary that is owned by non-group members. Beneficial entitlement is measured by reference to the beneficial entitlement to profits available for distribution to shareholders.
Entities that are not members of the ‘group’
Members of the group (i.e. 75%/ effective 51% subsidiaries of the principal company) may have interests in other entities. The treatment of the group members’ interests in these other entities (and, where appropriate, their underlying assets) flows from how the interests are dealt with in the Financial Statements for the property rental business under S532(2)(a) and the residual under S532(2)(c) (see IFM22340).
Condition B not met on joining the REIT regime
If a notice is given specifying a date which requires the commencement of a new accounting period from which CTA2010/Part 12 is to apply, and the balance of business asset test is not met at the beginning of that accounting period, then the REIT can stay in the regime provided that the condition is met at the start of the following accounting period (CTA2010/S566). This breach will not be taken into account when considering multiple breaches of REIT tests and conditions see IFM27060.