IFM30030 - Real Estate Investment Trust : Joint ventures: Joint Venture Look-Through Notice: Tax-exempt business and other conditions

In deciding whether it meets various regime conditions, the venturing company/group must take account of a portion of the assets, income etc. of the joint venture company/group.  The same definitions of property rental business, assets involved, method of valuation etc. apply as for a UK-REIT meeting the conditions on its own account (see IFM22020). 

Distribution requirement

The venturing company/group must include a relevant portion of the profits of the property rental business of the joint venture company or group in applying the distribution condition in CTA2010/S530.  The relevant portion is by reference to the venturing company’s/group’s level of beneficial interest in the joint venture company.

For example, venturing company (V) has 40% of the shares in joint venture company (J).  The income of V’s tax-exempt business for year to 31 December 2016 is 1,000 and of J’s property rental business is 500.  To meet the distribution requirement, V must distribute at least 1,080 (= 90% of (1,000 + (500 x 40%))) by 31 December 2017 (the CTSA filing date for V).    

Balance of Business Conditions A and B

CTA2010/S591 requires the venturing company/group to include a relevant portion of the profits of the property rental business of the joint venture company/group in deciding whether it has met the 75/25 profits test in CTA2010/S531.  The relevant portion is by reference to the venturing company’s/group’s level of entitlement to profits from the joint venture company/group. The venturing company/group must include a relevant portion of the value of the assets involved in the property rental business of the joint venture company/group in deciding whether it has met the 75/25 asset test in CTA2010/S531.  The relevant portion is by reference to the venturing company’s/group’s level of entitlement to profits from the joint venture company/group.

For example, venturing company V has 40% of the shares in the joint venture company (J).  The fair value of the assets involved in V’s tax-exempt business for year at 1 January 2017 is 12,000 and in its residual business is 2,000.  The fair value of the assets involved in J’s property rental business is 8,000, and in its residual business 7,500.  For the 75/25 test, the fair value of the tax-exempt business assets is 15,200 (= 12,000 + 40% of 8,000) and of the other activities 5,000 (= 2,000 + 40% of 7,500).  The condition is therefore met as the ratio is 75.2%. 

However, the joint venture company or group taken separately must also satisfy conditions A and B of CTA2010/S531, which it doesn’t in the above example. (CTA2010/S591)

Profit finance cost ratio

The profits and financing costs of the joint venture are taken into account in deciding whether the interest cover test is met. This is because CTA2010/S588 and S589 apply the REIT legislation to the joint venture company or members of a joint venture group, as though they were members of a REIT group.