Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Part 4 — Real Estate Investment Trusts
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the one company (including any terms or conditions attaching to the
right to transfer the shares) it is necessary or advantageous for a person
who has, disposes of or acquires shares of that company also to have,
to dispose of or to acquire a holding of shares of the other company.
(8)
Condition 4 is that at least 90% of the profits of the property rental business
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arising in the accounting period are distributed—
(a)
by way of dividend, and
(b)
on or before the filing date for the company’s tax return for the
accounting period (see paragraph 14 of Schedule 18 to FA 1998).
(9)
But—
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(a)
Condition 4 shall be disregarded if and in so far as compliance with it
would be unlawful by virtue of—
(i)
an enactment (including Northern Ireland legislation and an
Act of the Scottish Parliament), or
(ii)
an enactment of a jurisdiction outside the United Kingdom
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where the enactment is prescribed, or is of a kind prescribed, for
the purposes of this paragraph in regulations made by the
Commissioners for Her Majesty’s Revenue and Customs, and
(b)
a distribution that is withheld in order to prevent or reduce a charge to
tax arising under regulations under section 114 shall be treated for the
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purposes of Condition 4 as having been made.
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Conditions for balance of business
(1)
In order to be a company to which this Part applies in respect of an accounting
period Conditions 1 and 2 below must be satisfied in respect of the company.
(2)
Condition 1 is that in the accounting period the profits arising from tax-exempt
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business are at least 75% of the company’s total profits; and for that purpose—
(a)
“total profits” means profits arising from tax-exempt business plus
profits arising from non-tax-exempt business, and
(b)
“profits” means profits before deduction of tax and excluding realised
and unrealised gains and losses on the disposal of property, calculated
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in accordance with international accounting standards.
(3)
Condition 2 is that at the beginning of the accounting period the value of the
assets involved in tax-exempt business is at least 75% of the total value of assets
held by the company; and for that purpose—
(a)
an asset is involved in tax-exempt business if it is property involved in
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the relevant property rental business within the meaning given by
section 107(6)(a),
(b)
assets must be valued in accordance with international accounting
standards,
(c)
where international accounting standards offer a choice of valuation
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between cost basis and fair value, fair value must be used, and
(d)
no account shall be taken of liabilities secured against or otherwise
relating to assets (whether generally or specifically).

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Entering Real Estate Investment Trust Regime
109
Notice
(1)
If a company (which satisfies the requirement in section 106(1)) gives a notice
under this section specifying an accounting period from the beginning of
which this Part is to apply to the company, this Part shall apply to the company
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from the beginning of that accounting period.
(2)
A notice—
(a)
must be given in writing to the Commissioners for Her Majesty’s
Revenue and Customs,
(b)
must be given before the beginning of the specified accounting period,
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(c)
must be accompanied by a statement by the company that Conditions
1 to 6 in section 106 are reasonably expected to be satisfied in respect of
the company throughout the specified accounting period, and
(d)
must contain such other information, and be accompanied by such
other documents, as may be prescribed by regulations made by the
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Commissioners for Her Majesty’s Revenue and Customs.
110
Duration
Once this Part has begun to apply to a company, it shall continue to apply
unless and until it ceases to apply in accordance with any of sections 128 to 130.
111
Effects of entry
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(1)
Property rental business of C (pre-entry) shall be treated for the purposes of
corporation tax as ceasing at entry.
(2)
Assets which immediately before entry are involved in property rental
business of C (pre-entry) shall be treated for the purposes of corporation tax as
being sold by C (pre-entry) immediately before entry and re-acquired by C
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(tax-exempt) immediately after entry.
(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 assets.
(4)
For the purposes of CAA 2001—
(a)
the sale and re-acquisition deemed under subsection (2)—
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(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 (pre-entry) before entry in relation to an asset
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which is deemed under subsection (2) to be sold and re-acquired shall
be treated after entry as having been done by or to C (tax-exempt).
(5)
For the purposes of corporation tax, on entry one accounting period of the
company shall end and another shall begin.
(6)
For the purposes of subsection (2) an asset is involved in property rental
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business if it is property involved in the business within the meaning given by
section 107(6)(a).

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(7)
A gain accruing by reason of this section shall not be a chargeable gain.
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Entry charge
(1)
A company to which this Part applies shall be chargeable to corporation tax
under Case VI of Schedule D on an amount of notional income calculated in
accordance with subsection (3).
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(2)
The notional income shall be treated as arising to C (residual) on entry.
(3)
The notional income is—
where—
(a)
Market Value means the aggregate market value of assets treated as
sold and re-acquired under section 111(2) (ignoring any asset of
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negative market value), and
(b)
    Tax Rate means the percentage rate at which C (residual) is
chargeable to tax on profits.
(4)
No loss, deficit, expense or allowance may be set off against notional income or
tax arising under this section.
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(5)
The company may elect to have the notional income treated as arising in four
instalments, the first on the date of entry and the other three on the first three
anniversaries of that date; and for this purpose subsection (3) shall apply as if
the percentage referred to were—
(a)
0.50% for the first instalment,
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(b)
0.53% for the second instalment,
(c)
0.56% for the third instalment, and
(d)
0.60% for the fourth instalment.
(6)
If a company makes an election under subsection (5)—
(a)
notice of the election must be given to the Commissioners for Her
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Majesty’s Revenue and Customs with the notice under section 109,
(b)
the election is irrevocable, and
(c)
if this Part ceases to apply to a company before the third anniversary of
entry, any remaining instalments shall become chargeable
immediately.
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(7)
The Treasury may by regulations amend a percentage specified in subsection
(5) in order to reflect a change in interest rates; but regulations under this
subsection shall not have effect in relation to elections made before the
regulations come into force.
Assets etc
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113
Ring-fencing of tax-exempt business
(1)
For the purposes of corporation tax, the business of C (tax-exempt) shall be
treated as a separate business (distinct from—

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(a)
any business carried on by C (pre-entry),
(b)
any business carried on by C (residual), and
(c)
any business carried on by C (post-cessation)).
(2)
For the purposes of corporation tax C (tax-exempt) shall be treated as a
separate company (distinct from—
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(a)
C (pre-entry),
(b)
C (residual), and
(c)
C (post-cessation)).
(3)
In particular—
(a)
a loss incurred by C (tax-exempt) may not be set off against profits of C
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(residual),
(b)
a loss incurred in respect of C (residual) may not be set off against
profits of C (tax-exempt),
(c)
a loss incurred in respect of C (pre-entry) may not be set off against
profits of C (tax-exempt) (but this section does not prevent a loss of that
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kind from being set off against profits of C (residual)),
(d)
a loss incurred by C (tax-exempt) may not be set off against profits
arising to C (post-cessation) (in respect of business of any kind), and
(e)
receipts accruing after entry but relating to business of C (pre-entry)
shall not be treated as receipts of C (tax-exempt).
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(4)
In subsection (3) a reference to a loss includes a reference to a deficit, expense,
charge or allowance.
(5)
Section 392B of ICTA (ring-fencing of losses from overseas property business)
shall not apply to business of C (tax-exempt).
(6)
Paragraphs 5B and 5C of Schedule 28AA to ICTA (transfer pricing: exemption
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for small and medium enterprises) shall not apply to a company to which this
Part applies (whether to C (tax-exempt) or to C (residual)).
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Maximum shareholding
(1)
The Treasury may make regulations that apply to a company to which this Part
applies if it makes a distribution to or in respect of a person who—
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(a)
is beneficially entitled (directly or indirectly) to 10% or more of the
dividends paid by the company,
(b)
is beneficially entitled (directly or indirectly) to 10% or more of the
company’s share capital, or
(c)
controls (directly or indirectly) 10% or more of the voting rights in the
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company.
(2)
The regulations may, in particular—
(a)
cause a sum to be charged to tax, in accordance with the regulations,
(whether by reference to a person’s interest, to a rate of tax or
otherwise);
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(b)
provide that a charge does not arise, or is reduced, if the company takes
or does not take action of a specified kind.