IFM29015 - Real Estate Investment Trust : Miscellaneous: indirect ownership of property: Balance of business conditions
The Balance of business conditions (see IFM22065 are a hurdle the group or company has to pass to remain in the UK-REIT regime. For group UK-REITs, the test uses the figures contained within the financial statements under CTA2010/S532(2)(a) and (c). CTA2010/S533(1) provides that the figures for profits and assets are arrived at in accordance with International Accounting Standards. It follows that accountancy concepts are used to determine the treatment of income, expenses and asset values where the property is held by an entity other than a member of the REIT group. For deciding if the income and gains arising on indirectly held property are tax exempt see IFM29020 and IFM29025.
Group REITs: accountancy rules for other entities
For the balance of business conditions, the 75/25 comparison of profits and asset values is generally by reference to accountancy measures and the accountancy concept of group consolidated accounts. For example, intra-group transactions and balances are ignored. An accountancy approach is also taken when deciding whether the assets, profits etc are consolidated on what amounts to a line-by-line basis, rather than including the value of group members’ interests in the entity as a balance sheet asset. The accountancy approach is based on the level of influence group members have over the entity, and not by reference to whether or not the entity is transparent.
This principle translates into taking account the underlying profits and assets of entities where the group has significant influence. For the purposes of the UK-REIT rules, this is where group members’ interest in the entity is more than 20%. Where the group’s influence is not significant, the value of the group’s interest in the entity counts as a residual asset.
The consequence of this 20% cut-off is that some entities that are tax-transparent (for example partnerships) will be treated as opaque if the group has a 20% or less interest in it. However, this treatment for the balance of business conditions does not determine the tax treatment of property income and gains on disposals of the entity’s assets.
The exception to the level of influence test is for companies that are not members of the REIT group. The value of the group’s interest counts as a residual business asset, even if the interest is more than 20%, unless a Joint Venture notice is in place.
Single company UK-REITs and other entities
Apart from where there is a Joint Venture Look-Through notice in place, a single company UK-REIT does not prepare tax financial statements that consolidate activities across the entities in which it has an interest. In this case, the balance of business conditions take account of the legal nature of the vehicle and do not differentiate between interests in the entity above or below 20%. For example, if a single company UK-REIT has a 15% interest in a partnership, 15% of the profits and assets of the partnership are included in the balance of business asset and profits tests. If the single company UK-REIT has an 85% interest in a company, the profits and assets of the company are not included in the balance of business asset and profits tests: the value of the shareholding counts as a residual asset.