IFM22335 - Real Estate Investment Trust : Group conditions and rules: Financial Statements: property rental business and residual: other entities treated as transparent

The activities of entities other than group members are reflected in the financial statements for the property rental business and residual in one of two ways, depending on nature of the vehicle and the level of influence members of the group have over it. One way broadly treats the entity as transparent: the other treats the entity as opaque (see IFM22330).

Transparent treatment

For entities that are treated as transparent, the contributions of the entity to the financial statements of the property rental business and residual business are shown in the same way as that of 75% subsidiaries. The assets owned by the entity and the income, expenses etc arising on the activities carried on by the entity are divided between residual business and property rental business depending on the nature of the activities. Note that despite treating such interests as members for the purposes of financial statements s532(2)(a) and (c) to perform the Balance of Business tests, this treatment does not imply that the entities are members of the group for the purposes of financial statement s532(2)(b) used to carry out the tax based computation of UK property rental business profits.

This treatment applies to the following entities:

Non-corporate entities and open-ended investment companies (OEICs) in which members of the group have ‘significant influence’ (broadly, owning more than 20% of the entity – see IFM29030 including:

· unit trusts of all descriptions;

· partnerships; and

· joint ventures carried on through contractual arrangements;

· joint venture companies in respect of which a joint venture look-through election is in place (see IFM30005);

· companies that are members of the group, as defined in CTA2010/S606 (i.e. 75%/ effective 51% subsidiaries of the principal company of a Group REIT).

This means that some entities that are treated as opaque for tax purposes will be treated as transparent in the preparation of the financial statements of the property rental business and residual business. However, this treatment of the income arising and of assets held by the entity for the Balance of Business Conditions does not extend to calculation of tax-exempt profits.

Example

A member of a Group REIT has a 30% interest in an OEIC that owns a property valued at 1,000 and generating rental profit of 60. The OEIC also has cash on deposit of 400 which yields income in the amount of 20. As the interest held is greater than 20% it is regarded as a significant interest and is therefore treated as transparent. The interest in the OEIC is shown as if it were a member of the group in the financial statements of both the residual business and the property rental business.

Financial statement of the property rental business will show:

Asset of 300 (30% of 1000)

Income of 18 (30% of 60)

The financial statement of the residual business will show:

Asset of 120 (30% of 400)

Income of 6 (30% of 20)

However, this treatment for the purposes of the financial statements s532(2)(a) and (c) does not extend to financial statement s532(2)(b) which uses a tax based calculation to determine the UK property business profits of members of the group. For those purposes the group member with the interest in the OEIC will have a dividend of 24 arising to the residual part of its business, but it is exempt from CT because it is an ordinary company dividend. The group member with the interest in the OEIC will not have any income arising to its UK property rental business in respect of its interest in the OEIC.

This table at IFM22340 summarises the treatment of various types of vehicles.