IFM27035 - Real Estate Investment Trust : Breaches of conditions: Number and value of properties: Examples: CTA2010/S563 and S575
C is a UK-REIT and makes up its accounts to 31 December. On 1 January 2012, C’s property rental business consists of four residential properties, P1 to P4. The fair values are: P1 = £6million, P2 = £9million, P3 = £10million, P4 = £5million and so total fair value = £30million.
Scenario 1: one property exceeds 40% of the total value (condition B)
On 1 February 2012, C sells P3, reducing the total fair value of all properties to £20million. Since the fair value of P2 now exceeds 40% of the total, C’s property rental business fails property condition B for accounting period ending 31 December 2012.
C buys a new property P5 on 1 November 2013, fair value £8million. The fair values of the other properties are unchanged. Although C no longer has one property exceeding 40% of the total £28million fair value of the assets in the property rental business, it does not meet property rental business condition B for accounting period ending 31 December 2013, since the condition has to be met throughout the accounting period. C has therefore failed property rental business condition B for two successive accounting periods but met it again in the third (accounting period ending 31 December 2014).
C can therefore remain in the regime in despite having been in breach of property condition B for two accounting periods. This is because the two successive accounting periods counts as a single period under CTA2010/S575(4).
Scenario 2: fewer than three properties (condition A)
C sells P4 and P5 on 1 July 2016, retaining only two properties, P1 and P2. C has therefore failed property condition A for the accounting period ended 31 December 2016. As none of the properties have a value of £20m or more, Condition C would not be available to C if this scenario arose after the introduction of Condition C.
C buys another property P6 fair value £9million on 31 January 2017. Although C no longer has fewer than three properties in the property rental business, it does not meet property condition A for accounting period ending 31 December 2017, since the condition has to be met throughout the accounting period. C has therefore failed property condition A for two successive accounting periods but met it again in the third (accounting period ending 31 December 2018).
C also failed property condition B for the accounting periods ending 31 December 2016 and 31 December 2017, since P2 is more than 40% of the fair value of the properties for part of both periods. However this does not count as a separate breach of the property rental business condition for the purposes of deciding if CTA2010/S563(2) has been relied on more than twice in ten years. This is because the breach of property condition B is a necessary consequence of the breach of property condition A (CTA2010/S575(4)).
C can remain in the regime in spite of having been in breach of property conditions A and B for two accounting periods, as the breach of B is ignored and the two period are treated as a single period.
Scenario 3: breach for 3 successive accounting periods
The facts are as outlined for scenario 1, except that C delayed buying P5 until 1 February 2014.
C is in breach of property condition B for three successive accounting periods (CTA2010/S575(1)).
This may result in a notice from HMRC that C ceased to be a UK-REIT with effect from 31 December 2013 (CTA2010/S572(1)). This is because there are three separate breaches (as the three consecutive accounting periods breach does not count as a two-year ‘single’ breach followed by a second breach in the third period).
Scenario 4: not a necessary consequence
The facts outlined for scenario 2 apply, except that the fair value of P6 when acquired in January 2017 is £5million. As a result, the value of P2 still exceeds 40% of the new total value of £20million for P1, P2 and P6. On 1 March 2018, C buys P7, fair value £4million. C remains in breach of property condition B for accounting period ending 31 December 2018, but meets it again for the following period.
The breach of property condition B in accounting period ending 31 December 2018 is not as a necessary consequence of breaching condition A in the earlier period. It therefore counts as a separate occasion on which section 563(2) has been relied on to remain in the regime.
Scenario 5: ten year time limit for repeat breaches
The facts are as outlined in scenarios 1 and 2: C has relied on CTA2010 /S563(2) twice to remain in the regime. C again sells all but two of its properties on 15 January 2022, retaining a portfolio of P2 (now valued at £18million) and P6 (now valued at £19million). It then acquires P8, a large warehouse, for £22million on 1 July 2022.
C is in breach of property condition A for accounting period ending 31 December 2022. Although the event on 15 January 2022 that triggers this third breach is less than ten years after the event that triggered the first breach, the CTA2010/S575(2) rule does not apply because the ten year period runs from the start of the accounting period in which the first event happened (1 January - 31 December 2012 - see s575(3)) and so the breach on 15 January 2022 is not taken into account.
Scenario 6: value at the relevant time (condition C)
Following on from Scenario 5, in July 2024 C receives a too-good-to-miss offer and sells P2. The property portfolio now has two properties, P6 and P8.
Condition A is no longer met because C’s property rental business consists of fewer than 3 properties.
However, Condition C is satisfied because P8 is a commercial property rented out as a warehouse and the value of P8 when acquired was equal to or greater than £20million.
C has satisfied either conditions A and B or condition C for the whole of the accounting period ending 31 December 2024 which means there has been no breach of the property rental business condition.