IFM24505 - Real Estate Investment Trust : Residual income: general
Up to 25% of the profits a UK-REIT company or group makes, and up to 25% of the REIT’s assets, can derive from / be used for the purposes of activities which are not part of its qualifying property rental business, as defined in (CTA2010/S520). There is no restriction on what these activities might be, and the general rule is that the profits of these residual activities are computed according to the normal rules.
Profits from the residual business are chargeable to tax at the main CT rate. For financial years prior to 2015 small companies’ rates were not available to UK-REITs, either as single companies or for members of a Group REIT (CTA2010/S534(3)).
Division between residual and property rental business activities
The UK-REIT legislation operates by defining the activities that lie within the property rental business, and any other activity is then “residual” and taxable. With some exceptions listed in CTA2010/S604 and S605, both UK and overseas property rental activities are property rental business, both UK and overseas. For further information on which activities qualify as property rental business activities, see IFM22020.
Having identified the activities that give rise to property rental business income, the legislation provides that gains that arise on disposal of assets that are involved in generating property rental business income are not chargeable gains and are not therefore charged to tax. The computation of gains is dealt with at IFM25000onwards.
There are two exceptions to the rule that disposals of assets of the property rental business are not charged to tax. One is the disposal of properties used in the property rental business within 3 years of completion of a significant development. The other is where a property used in the property rental business is disposed of by way of trade. In both cases, the transaction is treated as though the assets had never been involved in the property rental business. Any profit, gain or loss will then arise in the residual business, i.e. the taxable part of the REIT group/company. The rental income and associated expenses that have included in the property income business profits are left undisturbed – see IFM24050 for more detail.
Within the company REIT / each member of the REIT group, the REIT legislation operates to prevent the use of losses, allowances and deficits that arise in the property rental business of the company (deemed to be a separate company for tax purposes) being used to reduce profits or gains arising in the residual business of the company. This restriction also operates in the other direction, to prevent losses etc arising in the residual business of the company being used in the property rental business of the company.
For Group REITs, there are similar provisions that prevent use of losses etc by way of group relief between the residual (taxable) business of one group member and the property rental business of another group member.
Mixed purpose income, expenses etc
Because the property rental business of a UK-REIT is deemed to be a separate business, carried on by a separate company, the normal rules for dealing with items that relate to separate persons and separate businesses carried on by the same person will operate to apportion them between the residual and property rental business income of the company.
For the avoidance of doubt however, the treatment is affirmed by CTA2010/S599(7), which provides that where income or an expense etc. relate partly to property rental business and partly to the residual business, the amounts are required to be apportioned reasonably between the two.