IFM24005 - Real Estate Investment Trust : Property rental income : Calculation of property rental business profits: general: CTA2010/S599

The REIT regime requires that there is a mechanism for calculating the profits of the property rental business, even though those profits are not subject to tax in the REIT. This is because the calculation determines i) the profits which are exempt from tax, ii) the distribution requirement and iii) the profit: financing cost ratio.

The rules apply to calculating the property rental business profits of the REIT company and of each member of a Group REIT that carries on property rental business.

CTA2010/S599 contains the rules for calculating the profits which relate to the tax-exempt UK property rental business. The starting point is that the profits of the property rental business should be calculated in the same way as those of a property business under CTA2009/Part 4 [CTA2010/S599(2)]

Detailed guidance on the property business rules can be found in the Property Income Manual (PIM). The following exceptions apply for REITs:

Capital allowances

Capital allowances are deductions in arriving at the taxable profits of a property business, and this rule is followed in calculating the profits of the property rental business. However the rules which allow a company to claim less than the full amount available are set aside – see IFM24010 for further details.

Debits and credits arising from loan relationship and derivatives contracts

CTA2009/S211(1) normally excludes debits and credits from loan relationship and derivative contracts for a property business. However under CTA2010/S599(3) this does not apply in respect of

· A loan relationship so far as it relates to the property rental business,

· A hedging derivative contract so far as it relates to the property rental business, or

· Embedded derivatives so far as the host contract is entered into for the purposes of the property rental business.

See IFM24020 to IFM24028 for further details.

Overseas property

Profits from overseas property (see CTA2009/S204 and S206) are part of the property rental business for these purposes where the overseas property is owned by a UK tax resident company.

Dual purpose income and expenses

Where an item of income or expenditure relates partly to the property rental business and partly to the residual business, the amount should be apportioned between the two on a just and reasonable basis (CTA2010/S599(7)).

Disposals by way of trade of property rental business property

Although the majority of disposals of assets used in the property rental business will be capital, there are circumstances when the disposal may amount to, or be deemed, a trade or adventure in the nature of trade (see IFM24030 onwards for background on the investment/trading borderline). As the profits of the property rental business that are not chargeable to tax are restricted to property income and capital gains arising from the property rental business, where this happens, the asset must leave the property rental business. The disposal is then part of the trading activities of the residual business.

For the purposes of the disposal, the property is treated as though it had never been within the property rental business (see IFM24050 for details of how this is achieved) and the company can reclaim any Entry Charge attributable to the property. However, the exclusion from the property rental business does not extend to the rent and associated expenses that arose before the sale, which remain part of the calculation of the profits of the property rental business in the accounting periods up to the date of sale.

Losses

See IFM24029

Corporate interest restriction

See CFM97700