IFM25050 - Real Estate Investment Trust : Capital gains: transactions within groups: examples (1)

The examples here and at IFM25055 illustrate how TCGA1992/S171, S171A, S135 and S179 operate where a Group REIT is involved. Indexation is ignored. 

Facts for examples

A Group REIT consists of principal company P and two subsidiaries, A and B.  P carries on most of the group’s property rental business together with some other activities, referred to here as the property rental business and residual business of P, respectively. 

P had acquired property X on 1 January 2013 for 800.  P transferred property X to the newly incorporated company A on 1 May 2014. At this time the market value of property X was 1,100 and that is the amount P subscribed for the share capital of A. The market value of property X on 1 January 2016 (the date the group joins the regime) was 1,300.  A has no other activity apart from renting out property X. 

B carries on only residual activities. 

The deemed groups (CTA2010/S536(2)) are

  • The group so far as it carries on a property rental business, a group consisting of the  property rental business of P and the property rental business of A (B has no property rental business activities),
  • The pre-entry group, a group consisting of P, A and B (up to the date the group joined the regime), and
  • The group so far as it carries on residual business, a group consisting of the residual business of P and B (since A has no residual business and B has no property rental business).   

For the purposes of TCGA1992/S171 and S171A it is only necessary to make a distinction between two groups

  • the group in so far as it carries on property rental business, and
  • the group in so far as it carries on residual business

Situation 1

On 1 May 2016, P started to occupy X as the headquarters of the group, when the market value of X is 1,500.  P pays rent to A, as owner of X. The asset ceases to be part of the property rental business of A and transfers to the residual business of A.  The group in so far as it carries on residual business now consists of the residual business of P, the residual business of A and B. Put simply, all the property rental business is now conducted by P. 

Although A’s ownership of property X has not changed, there is a disposal for tax purposes. Property X has left the property rental business to join the residual business which is a separate group for the purposes of TCGA1992/S171 and therefore an adjustment is necessary.

The immediate effect is that A’s property rental business has disposed of property X to A’s residual business at a market value of 1,500. While the  disposal   of property X by A is in the course of  A’s property rental business  and does not create a chargeable gain, there will be a rebasing of A’s interest in property X for the purposes of its residual  business which will be the market value of X at the date of transfer (ie 1,500).

In the future, if the shares of A  are sold no degrouping charge will arise since A,  in so far as it carries on residual business, is treated as a separate company, in a separate group,  from A in so far as it carries on property rental business for the purposes of corporation tax (CTA2010/S541). As such, A, in so far as it carries on its residual business, has not acquired an asset under TCGA1992/S171.

Two more situations based on the same facts are considered in IFM25055.