Finance (No.2) Bill

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
110

(c)
anything done by or to C (tax-exempt) before the deemed sale and re-
acquisition shall be treated after the deemed sale and re-acquisition as
having been done by or to C (residual).
(5)
Subsection (6) applies when an asset which has been used wholly and
exclusively for the purposes of the business of C (tax-exempt) is disposed of in
5
the course of trade for the purposes of the business of C (residual).
(6)
Where this subsection applies—
(a)
the deemed sale and re-acquisition under section 111(2) shall be
disregarded, and
(b)
the asset shall be treated as having been disposed of in the course of the
10
business of C (residual).
(7)
Subsection (6) shall be taken to apply, in particular, where—
(a)
a property acquired by a company to which this Part applies has been
developed since acquisition,
(b)
the cost of the development exceeds 30% of the fair value of the
15
property (determined in accordance with international accounting
standards) at entry or at acquisition, whichever is the later, and
(c)
the company disposes of the property within the period of three years
beginning with the completion of the development.
(8)
Where subsection (6) applies in relation to an asset held at entry, the company
20
may make a claim for repayment of a proportion of the tax paid under section
112 calculated as follows—
where—
(a)
Asset Market Value means market value of the asset at entry,
(b)
Aggregate Market Value means the aggregate market value of assets
25
treated as sold and re-acquired under section 111(2) (ignoring any asset
of negative market value), and
(c)
Tax Paid means tax paid under section 112.
126
Movement of assets into ring-fence
(1)
This section applies where an asset which has been used wholly and
30
exclusively for the purposes of the business of C (residual) begins to be used
wholly and exclusively for the purposes of the business of C (tax-exempt).
(2)
The asset shall be treated as having been—
(a)
disposed of by C (residual), and
(b)
immediately re-acquired by C (tax-exempt).
35
(3)
The sale and re-acquisition deemed under subsection (2) shall be treated as
being for a consideration equal to the market value of the asset.
(4)
For the purposes of CAA 2001—
(a)
the sale and re-acquisition deemed under subsection (2)—
(i)
shall not give rise to allowances or charges, and
40

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
111

(ii)
shall not make it possible to make an election under section 198
or 199 of that Act (apportionment),
(b)
subsection (3) above shall not apply, and
(c)
anything done by or to C (residual) before the deemed sale and re-
acquisition shall be treated after the deemed sale and re-acquisition as
5
having been done by or to C (tax-exempt).
127
Interpretation
Sections 124 to 126 shall be construed as one with TCGA 1992.
Leaving Real Estate Investment Trust Regime
128
Termination by notice: company
10
(1)
If a company to which this Part applies gives a notice under this section
specifying a date at the end of which this Part is to cease to apply to the
company, this Part shall cease to apply to the company at the end of that date.
(2)
A notice must be given in writing to the Commissioners for Her Majesty’s
Revenue and Customs.
15
(3)
The date specified under subsection (1) must be after the date on which the
Commissioners receive the notice.
129
Termination by notice: Commissioners
(1)
If the Commissioners for Her Majesty’s Revenue and Customs give a company
to which this Part applies a notice in writing under this subsection, this Part
20
shall cease to apply to the company.
(2)
The Commissioners may give a company a notice only if—
(a)
the company has relied on a provision of regulations under section 116
on a specified number of occasions in a specified period,
(b)
the company has been given a specified number of notices under
25
section 117 in a specified period, or
(c)
the Commissioners think that a breach of a requirement in section 107
or 108, or an attempt by the company to obtain a tax advantage, is so
serious that this Part should cease to apply to it.
(3)
In subsection (2) “specified” means specified in regulations made by the
30
Treasury.
(4)
A notice under subsection (1) must state the reason for it.
(5)
Where a notice is given to a company, this Part shall be taken to have ceased to
apply to the company at the end of the accounting period before the accounting
period during which the event occurs (or the last event occurs) which caused
35
the Commissioners to give the notice.
(6)
Where a notice is given to a company, the company may appeal to the Special
Commissioners.
(7)
An appeal must be instituted by notice given in writing to the Commissioners
for Her Majesty’s Revenue and Customs during the period of 30 days
40
beginning with the date on which the notice is given to the company.

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
112

130
Automatic termination for breach of requirement
(1)
Where Condition 1, 2, 5 or 6 of section 106 is not satisfied in respect of an
accounting period of a company to which this Part applies, this Part shall be
taken to have ceased to apply to the company at the end of the previous
accounting period.
5
(2)
A company which gave a notice under section 109 shall notify the
Commissioners for Her Majesty’s Revenue and Customs as soon as is
reasonably practicable if Condition 1, 2, 5 or 6 of section 106 ceases to be
satisfied in relation to the company.
131
Effects of cessation
10
(1)
The business of C (tax-exempt) shall be treated for the purposes of corporation
tax as ceasing immediately before cessation.
(2)
Assets which immediately before cessation are involved in the business of C
(tax-exempt) shall be treated for the purposes of corporation tax as being sold
by C (tax-exempt) immediately before cessation and re-acquired immediately
15
after cessation by C (post-cessation).
(3)
The sale and re-acquisition deemed under subsection (2) shall be treated as
being for a consideration equal to the market value of the asset.
(4)
For the purposes of CAA 2001—
(a)
the sale and re-acquisition deemed under subsection (2)—
20
(i)
shall not give rise to allowances or charges, and
(ii)
shall not make it possible to make an election under section 198
or 199 of that Act (apportionment),
(b)
subsection (3) above shall not apply, and
(c)
anything done by or to C (tax-exempt) before cessation in relation to an
25
asset which is deemed to be sold and re-acquired shall be treated after
cessation as having been done by or to C (post-cessation).
(5)
For the purposes of corporation tax, on cessation an accounting period of C
(residual) shall end and an accounting period of C (post-cessation) shall begin.
(6)
For the purposes of subsection (2) an asset is involved in the business of C (tax-
30
exempt) if it is property involved in the business within the meaning given by
section 107(6)(a).
132
Early exit by notice
(1)
This section applies where this Part—
(a)
ceases to apply to a company by reason of section 128, and
35
(b)
had applied to the company for a continuous period immediately
before cessation of less than ten years.
(2)
If the company disposes of a tax-exempt asset during the post-cessation period,
liability to corporation tax shall be determined without regard to—
(a)
any deemed disposal under section 111(2) that resulted in a gain,
40
(b)
any deemed disposal under section 131(3), or
(c)
any deemed disposal under section 125(2).
(3)
In subsection (2)—

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
113

(a)
“tax-exempt asset” means an asset that was involved (within the
meaning of section 107(6)(a)) in the business of C (tax-exempt), and
(b)
“the post-cessation period” means the period of two years beginning
with the date of cessation.
133
Early exit
5
(1)
This section applies where this Part—
(a)
ceases to apply to a company by reason of section 129 or 130, and
(b)
had applied to the company for a continuous period immediately
before cessation of less than ten years.
(2)
The Commissioners for Her Majesty’s Revenue and Customs may direct—
10
(a)
that a provision of this Part shall have effect in relation to the company
with a specified modification, or
(b)
that a provision of an enactment relating to corporation tax shall apply,
not apply or apply with modifications in relation to the company.
(3)
A direction under subsection (2)(a) may, in particular—
15
(a)
alter the time at which this Part is taken to cease to apply to the
company in accordance with section 129 or 130;
(b)
disapply or alter the effect of section 119(1) or 124(1)).
(4)
A direction under subsection (2)(b) may, in particular, prevent all or a specified
part of a loss, deficit or expense from being set off or otherwise used at all or in
20
a specified manner.
(5)
A company in respect of which a direction is given under this section may
appeal to the Special Commissioners.
Groups
134
Group Real Estate Investment Trusts
25
(1)
A group of companies may become a group to which this Part applies; and for
that purpose the provisions of this Part apply to a group of companies in the
same way as to a company, subject to the modifications set out in Schedule 17.
(2)
For the purposes of this Part a company (“the principal company”) and all its
75% subsidiaries form a group; and if any of those subsidiaries have 75%
30
subsidiaries the group includes them and their 75% subsidiaries, and so on.
(3)
But a group does not include—
(a)
a company (other than the principal company) which is not an effective
51% subsidiary of the principal company,
(b)
an insurance company,
35
(c)
an insurance subsidiary, or
(d)
an open-ended investment company.
(4)
In this section—
(a)
“effective 51% subsidiary” has the meaning given by section 170 of
TCGA 1992 (groups of companies),
40
(b)
“75% subsidiary” has the meaning given by section 838 of ICTA
(subsidiaries),

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
114

(c)
“insurance company” has the meaning given by section 431(2) of ICTA,
and
(d)
“insurance subsidiary” means a company in which 75% or more of the
ordinary shares are held by one or more insurance companies.
(5)
A company cannot be a member of more than one group; and if a company
5
would be a member of more than one group, section 170(6) of TCGA 1992
(capital gains tax: groups) shall apply to determine the group of which it is a
member.
(6)
Subsection (5) is subject to section 138.
135
Transfer within group
10
After section 171(2)(d) of TCGA 1992 (transfer within a group: exclusions)
insert—

“; or
(da)
a disposal by or to a company to which Part 4 of the Finance Act
2006 applies (Real Estate Investment Trusts);”.
15
136
Availability of group reliefs
(1)
In the application of a provision specified in subsection (2) to a group to which
this Part applies G (property rental business) shall be treated as a separate
group (distinct from—
(a)
G (pre-entry),
20
(b)
G (residual), and
(c)
G (post-cessation)).
(2)
The provisions mentioned in subsection (1) are—
(a)
sections 171 and 171A of TCGA 1992 (actual or notional transfer of
assets within group),
25
(b)
sections 179A and 179B of TCGA 1992 (reallocation or roll-over of gain
within a group),
(c)
Chapter 4 of Part X of ICTA (corporation tax: group relief),
(d)
Schedule 9 to FA 1996 (loan relationships),
(e)
Schedule 26 to FA 2002 (derivative contracts), and
30
(f)
Schedule 29 to FA 2002 (intangible assets).
Miscellaneous
137
Insurance companies
In section 212(1) of TCGA 1992 (annual deemed disposal of holdings of certain
assets) after paragraph (b) insert—
35

“, or
(c)
shares in a company to which Part 4 of the Finance Act 2006
applies (Real Estate Investment Trusts),”.
138
Joint ventures
(1)
The Treasury may by regulations provide for this Part to apply in relation to
40
property rental business (“the joint venture”) carried on—

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
115

(a)
jointly by a company to which this Part applies and another person, or
(b)
by a person in which a company to which this Part applies has an
interest.
(2)
The regulations may, in particular, modify or disapply a provision of this Part
in its application—
5
(a)
by virtue of this section, or
(b)
in relation to a company to which this Part applies where the company
also carries on business in relation to which this Part applies by virtue
of this section.
(3)
The regulations may, in particular, make application of this Part conditional
10
on—
(a)
a company to which this Part applies having a minimum percentage
interest of a specified kind in the joint venture;
(b)
an election by a company to which this Part applies.
139
Manufactured dividends
15
(1)
This section applies to a manufactured dividend if and to the extent that it is
representative of a dividend paid by a company to which this Part applies in
respect of profits of C (tax-exempt).
(2)
Schedule 23A to ICTA shall have effect with the substitution of the following
for paragraph 2(2)—
20
    “(2)
Sub-paragraphs (2A) to (2C) apply if and to the extent that a
manufactured dividend is representative of a dividend in respect of
profits of the tax-exempt business of a company to which Part 4 of
the Finance Act 2006 applies.
     (2A)
The Tax Acts shall have effect in relation to the recipient, and persons
25
claiming title through or under him, as if the manufactured dividend
were a dividend to which section 121 of that Act applied.
     (2B)
In relation to the dividend manufacturer—
(a)
if the dividend manufacturer is a company and the
manufactured dividend is paid in the course of a trade
30
carried on in the United Kingdom, it shall be treated as an
expense of the trade;
(b)
if the manufactured dividend is paid in connection with
investment business, it shall be treated for the purposes of
section 75 of this Act as expenses of management;
35
(c)
in the case of a company carrying on life assurance business,
in so far as the manufactured dividend is referable to basic
life assurance and general annuity business (or is or would
be, if received by the company, be treated as referable to
business of that kind by virtue of section 432A) it shall be
40
treated for the purposes of section 76 as if it were an expense
payable falling to be brought into account at Step 3 of section
76(7);
(d)
regulations under section 122 of FA 2006 shall apply (with
any necessary modifications) to the dividend manufacturer
45
(whether or not a company) as if he were a company to which
Part 4 of the Finance Act 2006 applied, unless—

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
116

(i)
the dividend manufacturer is not resident in the
United Kingdom, and
(ii)
the manufactured dividend is paid otherwise than in
the course of a trade carried on through a branch or
agency in the United Kingdom.
5
     (2C)
The Treasury may by regulations provide, in a case where sub-
paragraph (2B)(d)(i) and (ii) above apply, for a United Kingdom
recipient of the manufactured dividend (within the meaning of
paragraph 4(3A) below) to be liable to account for tax which the
dividend manufacturer would have been required to deduct in
10
accordance with regulations under section 122 of the Finance Act
2006.
     (2D)
Sub-paragraph (2E) shall apply for the purposes of—
(a)
this paragraph, and
(b)
regulations under section 122 of the Finance Act 2006.
15
     (2E)
The gross amount of a manufactured dividend to which sub-
paragraphs (2A) and (2B) apply shall be taken to be equal to the gross
amount of the dividend of which it is representative and which is
paid by the company to which Part 4 of the Finance Act 2006
applies.”
20
(3)
For the purposes of sections 736B of ICTA (deemed manufactured payments:
stock lending), regulations under section 122 shall be treated, in so far as they
apply to a dividend manufacturer, as if they were regulations made under
Schedule 23A.
(4)
For the purposes of section 737A of ICTA (deemed manufactured payments:
25
sale and repurchase of securities) regulations under section 122 shall be
treated, in so far as they apply to a dividend manufacturer, as dividend
manufacturing regulations (within the meaning of section 737A(6)).
(5)
After section 737C(3) of ICTA (amount of deemed manufactured dividend)
insert—
30
“(3A)
But if and to the extent that the dividend mentioned in section
737A(2)(a) or (2A)(a) is a dividend paid by a company to which Part 4
of the Finance Act 2006 applies in respect of profits of its tax-exempt
business—
(a)
the amount of the deemed manufactured dividend shall be
35
taken to be an amount equal to the gross amount of the
dividend mentioned in section 737A(2)(a) or (2A)(a);
(b)
any deduction which, by virtue of paragraph 2 of Schedule 23A
(as amended by section 139 of the Finance Act 2006), is required
to be made out of the gross amount of the manufactured
40
dividend shall be deemed to have been made;
(c)
the repurchase price of the securities shall be treated, for the
purposes of section 730A, as increased by the gross amount of
the deemed manufactured dividend.”
(6)
In section 737D(2) of ICTA (manufactured payments: relief) after “any” insert
45
“manufactured dividend,”.
(7)
In this section “dividend manufacturer” and “manufactured dividend” have
the meaning given by Schedule 23A to ICTA.