IFM23005 - Real Estate Investment Trust : Entry to the regime: overview

The UK-REIT regime is elective. For the tax exemptions to apply to its property rental business, a REIT must meet the necessary conditions but must also give notice that it wants the UK-REIT rules to apply to it, its distributions and investors who receive those distributions. Note that the regime applies to the REIT from the date specified in the notice, and not from the day the notice is given.

Where the principal company of a group gives notice to be a group REIT, all 75% subsidiaries (as defined in CTA2010/S606(1)) are automatically included within the REIT regime. It is not possible to give notice that some but not all of those subsidiaries are covered. A company with 75%/ effective 51% subsidiaries may however give notice under CTA2010/S524 to become a UK-REIT as a single company.

Single company election for a group of companies

It is possible for a company with 75% subsidiaries to give notice under CTA2010/S524 to be a company to which CTA2010 /Part 12 applies. This means that the property rental business of the company itself is taken into account in deciding if the conditions for entering and remaining in the regime are met, but the same type of activities undertaken by subsidiaries are not taken into account.

Regardless of the nature of the activities undertaken by any 75% effective 51% subsidiaries, it is the value of the shares in those companies and the dividends they pay that are taken into account as non-qualifying income and assets. Even if the subsidiaries carry on property rental business, the income and gains arising are not exempt from tax. The rental income is not included in the distribution requirement.

The treatment of property held indirectly, for example through partnerships or Property unit trusts, depends on the nature of the entity (see IFM29010 onwards).

Effect of Entry

On entry to the regime the accounting period of the incoming company for CT purposes ceases and a new one begins. A line is drawn between the property rental activities of the REIT before entering the regime, and those that are carried on and exempt from tax while the REIT is within the regime. All the assets that move into the property rental business are treated as though they have been sold by the REIT just before it joins the regime, and immediately reacquired by the property rental business after it joins.

This sale and reacquisition is deemed to take place at market value but does not give rise to a chargeable gain (or allowable loss). For capital allowance purposes, the transaction is deemed to take place at a value that results in no balancing charges or allowances – and ‘stand-in-shoes’ treatment applies to the ‘new’ owner.

Entry Charge

Prior to 17th July 2012 an Entry Charge was payable at 2% of the market value of property assets that were moved to the property rental business. (see IFM23025) This was payable at the same time as CT due for the first accounting period that the REIT was in the regime and where the quarterly instalment payment regime applies the entry charge was spread on a similar basis. A REIT joining the regime had the option to pay the Entry Charge in four yearly instalments, in which case the charge was increased slightly to take account of the time value of money.

Timing

The REIT remains in the regime until either a notice to withdraw from the regime is given by the REIT or by HMRC or the REIT breaches a qualifying condition in such a way that the regime ceases to apply. When a REIT demerges into two REITs CTA2010/S558 or S559 apply see IFM26010.

Minority share holdings

Not all members of the group will be 100% owned by the principal company or other group members. In this case, the regime applies only to the portion of the company that is owned by group members.

Separate rules may apply for Joint Ventures (see IFM30000)

Non-resident group members

To the extent that a non-resident member of the group carries on UK property rental business, the profits (income and gains) are exempt from UK tax (see IFM21080). Similar consequences in terms of deemed sale and reacquisition of assets apply to the assets of the non-resident group member that are involved in a UK property rental business carried on by it.

Companies joining a group that is already a Group REIT

When the principal company of a group gives notice for its group to join the regime that covers all the companies that are 75% effective 51% subsidiaries at the date the notice is effective. If a company subsequently becomes a 75% effective 51% subsidiary, the regime applies to the new group member in the same way as it does to companies that were group members at the date the group joined the regime.

When a new company joins a Group REIT, the consequences for the new company are the same as for a company that was a member of the group on the day the group joined the regime. There is a deemed sale and reacquisition of the assets of the property rental business of the new group member on the day it joins the group (subject to any portion disregarded on account of minority share-holdings).