IFM27065 - Real Estate Investment Trust : Breaches of conditions: multiple breaches: CTA2010/S577

The legislation that sets out the consequences of breaching each of the regime conditions specifies how many times each condition can be breached before HMRC may issue a termination notice for the regime.  This is generally two in any ten year period.  If the UK-REIT breaches different conditions, CTA2010/S577 sets out how many breaches can occur before the UK-REIT must leave the regime.  This is more than four in any ten year period.  For an example, see IFM27070. 

For the multiple breach rules to apply, the UK-REIT must breach at least two conditions in sections 528 to 531, but contained in different sections of CTA2010, during the relevant ten year period. For this purpose the section 530 distribution condition is to be treated as contained in section 529. Thus breaching the Balance of business Condition (income test) in section 531(1) and property condition A (three or more properties) in section 529(1) would count as two different conditions for this purpose, since they are in different sections. Whereas breaching the distribution condition in section 530 and the property condition A in section 529 would not count as within different sections. 

Breaches not to be taken into account are in section 577(7), these are:

  • breaches of conditions C (admitted to trading) and D (Not ‘close’) of section 528 when a REIT company becomes part of another REIT group,
  • breaches of condition C of section 528  when the company relies on section 525(2) to (4) (breach on first day of accounting period 1, where reasonably expected to meet the condition in the remainder of the accounting period),
  • a breach of any of conditions C, E (ordinary share capital) and F (loans) in section 528 in respect of which sections 558(3) or 559(6) (demergers) applies,
  • a breach of the balance of business income test in accounting period 1, or
  • a breach of the balance of business asset test at the beginning of accounting period 1.

Multiple breaches of conditions in the same section

The rules in CTA2010/S577 (multiple breaches of conditions in chapter 2) have the same four strikes and out consequence (see IFM27060).  The UK-REIT can breach the income test twice in ten years and the asset test twice in ten years, but if either condition is breached again within the ten year period, HMRC may issue a notice for the regime to cease to apply as a result of CTA2010/S576.  

Breaches lasting for more than one accounting period

For the property conditions and the Balance of business conditions, a breach that continues for two consecutive accounting periods counts as a single breach for the purposes of the multiple breach rule. However if the breach lasts three consecutive accounting periods, the breach is serious and HMRC may issue a notice for the regime to cease to apply (CTA2010/S575 and S576). 

Breaches resulting from take-over

If a breach of the admitted to trading requirement or of the ‘not close’ condition is the result of being taken over by another UK-REIT, it does not count towards the four breaches that are allowed in ten years (CTA2010/S577(7)(a)). 

Profit: financing cost ratio and excessive shareholding rule

Breaches of the Profit: financing cost ratio (CTA2010/S543) or the excessive shareholding rule (CTA2010/S551) do not count as breaches for the purposes of the four times in ten years rule. 

Ten year time limit

The ten year time limit runs from the date the company fails the condition, which may not be the same as the date of the event that triggers the failure.  For example, if the UK-REIT sells all but two of its properties on 1 May 2017, property condition A is failed with effect from 1 January 2017 (assuming a 31 December accounting date).  The ten year period therefore runs from 1 January 2017 and not from 1 May 2017.     

Although it may be some time before the company is aware that a breach has occurred (for instance, becoming close because of the actions of shareholders), the company must inform HMRC as soon as they do become aware.  For the purposes counting up repeat breaches, either of one particular condition or multiple breaches of two or more different conditions, within the relevant time limits, the clock starts when the breach occurs, and not when the company becomes aware of it or when it notifies HMRC.