IFM27005 - Real Estate Investment Trust : Breaches of conditions: overview
To be a UK-REIT, a single company or group must meet a number of conditions. There are also conditions that if breached, result in additional tax being charged, but do not result in termination of the regime. Common to all of these (including automatic termination breaches) is a requirement on the company to tell HMRC what has happened as soon as reasonably possible – see IFM27010. The rules relating to the consequences of breaching the regime’s conditions are set out in CTA2010/Part 12/Chapters 8 and 9.
The regime also has two events that result in additional tax where certain conditions are met; the Holder of Excessive Rights rule (CTA2010/S551), set out at IFM22110, and the Profit: Financing Costs ratio (CTA2010/S543) set out at IFM22200.
Automatic termination
Some conditions are absolute requirements, and breaching results in automatic removal from the regime (CTA2010/S578). The conditions are CTA2010/S528 company conditions A (UK residence), B (not an open-ended investment company), E (restrictions on classes of share in issue) and F (prohibition of certain loans, including those linked to business results, where the interest rate exceeds a reasonable commercial return, or otherwise included within CTA2010/S528(8)).
Breach of company conditions C (shares admitted to trading on a recognised stock exchange) and D (not close) may result in automatic termination, but in some circumstances (take-overs, demergers or where the breach was a result of the action of others), the company or group can remain in the regime (see IFM27015, IFM27020 and IFM27025).
Minor breaches
Whilst not a term used in the legislation, where the rules permit a breach to be remedied in a certain period without immediate consequences the related breach is referred to in this guidance as a ‘minor breach’.
Breaching the CTA2010/S530 distribution requirement may result in a loss of tax to the Exchequer. For this condition, companies may suffer a tax consequence if they do breach it but will remain in the regime unless the breach is regarded as serious and a notice removing the company is issued (see IFM27065).
Similar tax consequences follow for breaching the Profit Financing Costs ratio (see IFM22205) and for paying a dividend to a Holder of Excessive Rights (see IFM22120). However, in these two situations there is no provision requiring the company/group to exit the regime, irrespective of the amounts involved or the number of such events.
For the other conditions of the regime, where there is no immediate loss of tax resulting from the breach, provided the breach is quickly remedied, the company or group can remain in the regime. These are dealt with in more detail at IFM27030 and IFM27055.
Multiple breaches
There are limits to how often a company or group can breach most of the individual conditions, and once that limit is exceeded within a ten-year period, HMRC may issue a notice to terminate the regime. The number of breaches that are allowed depends on the condition being breached (see IFM27075).
There is also a limit to the number of times a REIT can breach several different conditions in aggregate – again, if the limit is exceeded within a ten-year period, HMRC may issue a notice to terminate the regime (see IFM27065).
Major or serious breaches
If HMRC thinks that a breach of any of the property rental business Conditions or the 75/25 balance of business conditions is serious, they may give notice to the company to remove the company or the group from the UK-REIT regime. This is regardless of whether the limits for breaching any of the individual conditions, or the multiple breach limits have been reached. The consequences of the issue of a termination notice by HMRC are dealt with at IFM26025.
There is right of appeal against the issue of a termination notice.