IFM25006 - Real Estate Investment Trust : Capital gains: on disposals of assets used in the property rental business :- CTA2010/S535

Gains made on assets that are used in the property rental business are not chargeable gains (CTA2010/S535)

Gains not chargeable are those arising on disposal of assets that have been used wholly and exclusively for the purposes of the property rental business throughout their period of ownership (CTA2010/S535(2)). There are extensions to this rule to deal with assets that have been used partly or wholly for residual business purposes (see IFM25010), including a de minimis rule for assets where residual use has been insignificant.   

Where an asset moves into or out of the property rental business, there is a deemed sale and reacquisition at market value – see IFM23020 for more detail. 

Taxation of gains on disposal of assets used in the residual business

Gains made on assets used for the residual business of the company are chargeable gains taxable at the main CT rate.

Part of an asset used wholly and exclusively for one class of business 

If part of an asset is sold and that part had been used wholly and exclusively for the property rental business, then the gain arising on that part will not be a chargeable gain. This applies whether the part retained is used for the property rental or the residual business of the company. This is because CTA2010/S608 treats references to ‘asset’ in the UK-REIT rules to include reference to part of an asset. 

This means that part disposals by a single company REIT, or by a company forming part of a Group REIT, where a gain on disposal would not be a chargeable gain need not follow the usual TCGA1992/S42 rule. The capital gains cost of the asset sold should be calculated by reference to a reasonable apportionment of the cost of the larger asset.  

Application of TCGA rules to UK-REITs

Apart from the part-asset treatment described above, normal TCGA rules apply to computing the quantum and timing of gains arising on disposal of assets used in both the property rental and residual activities of a UK-REIT. For example, where ‘market value’ is used in CTA 2010/S555-S557, the phrase takes its meaning from TCGA1992/S272, as the price which an asset might reasonably be expected to fetch on a sale in the open market (CTA2010/S609). 

There are some differences where assets have had mixed use prior to disposal (see IFM25010), in the application of TCGA1992/S171 (transfers within a group) for single company UK-REITs that have 75% subsidiaries (see IFM29200) and, for Group REITs, TCGA1992/S171 and S171A (actual or notional transfers of assets within a group)).  

Although not affecting the capital gains of the UK-REIT itself, UK-REIT shares are added to the list of investments covered by the special rule in TCGA1992/S212(1)(annual deemed disposals of holdings of certain assets) for the long term funds of insurance companies (see IFM29100). 

For disposals on or after 1 April 2017 Finance (No 2) Act 2017 introduced a new substantial shareholdings exemption for disposals of shares in non-trading companies owned wholly or partly by Qualifying Institutional Investors (QII). The REIT is not a QII for this purpose. However the exemption may be available for disposals of shares in a REIT group company where the shareholders are QIIs and the conditions are met. (see CG53012, CG53073 and CG53167).