IFM27015 - Real Estate Investment Trust : Breaches of conditions: Admitted to trading, “listed” or traded and 'not close' requirements): take-overs: CTA2010/S562(2), 562A(5), 562B(3) and 562C(3)
The general rule for breach of company condition C (shares admitted to trading on a recognised stock exchange (RSE); CTA2010/S528(3)) (see IFM22010), the further condition relating to shares (“listed” throughout the accounting period or traded on a RSE; CTA2010/S528A, subject to the relaxation given by CTA2010/S528B) (see IFM22010) and condition D (‘not close’ CTA2010/S528(4), subject to the relaxation given by CTA2010/S527(6)) is automatic termination, taking effect from the end of the previous accounting period (see IFM27025). However, if the company or group has been taken over by another UK-REIT, it can remain in the regime despite breaching these conditions.
Where the target company or group is subject to a take-over bid, the shares of the target company (principal company in the case of a Group REIT) will no longer be admitted to trading on a RSE. The target would therefore fail company condition C, and the regime would normally cease to apply with effect from the end of the previous accounting period.
Likewise, on a take-over bid, shares in the target will no longer be “listed” on a RSE or may fail to be traded on a RSE during the AP, resulting in a breach of the CTA2010/S528A “listed” or traded requirement.
The target company (principal company in the case of a Group REIT) may become a close company, as that term applies for the purposes of CTA2010/S528 (4) and (5) see IFM22015) at some stage during the take-over bid, and may, therefore, fail Company Condition D. Normally, this would also stop the regime applying from the end of the previous accounting period.
However where the company that made the bid is also a UK-REIT, or part of a Group REIT, the target remains in the regime, despite having failed company conditions C, D or the “listed” or traded requirement for the accounting period in which the take-over happened (CTA2010/S562(2), 562A(5), B(3) and C(3)) . Furthermore these breaches do not count towards the number of times conditions can be breached before being expelled from the regime.
If the company that makes the bid is not also a UK-REIT, or member of a Group REIT, then the target will generally cease to be a UK-REIT from the end of the accounting period before the condition was breached. The exception to this is where the only breach relates to condition D (‘not close’) and is remedied by the end of the accounting period following the one in which the breach occurred. In that case, the company can remain in the regime, provided it meets all the other conditions for being in the regime (CTA2010/S562A(6)) (see IFM27020).
A REIT should talk to HMRC if it is concerned about how being subject to a take-over bid will affect REIT status
Example
Companies P and T both make their accounts up to 31 December. T is a UK-REIT. P is the principal company of a group. In May 2017, P launches a bid for T. P’s stake in T increases, the bid goes unconditional and on 1 November 2017, T ceases to be admitted to trading, its shares cease to be ‘listed’ or traded, and it becomes a subsidiary of P.
If P’s group is not a Group REIT, T stops being a UK-REIT with effect from 31 December 2016. The profits and gains of its property business arising after 1 January 2017 are taxable (although T will continue paying property income distributions under deduction of basic rate tax until it has distributed all the property rental business income and gains that arose up to 31 December 2016).
If P’s group is a Group REIT, then T does not cease to be a UK-REIT between 1 January and the date it ceased to be admitted to trading or ‘listed’/traded on the RSE. There is no deemed sale and reacquisition of the assets of the property rental business of T (CTA2010/S538(6)).