Chapter 1: Introduction

Clause 518: Introduction to Part

1594.     This clause is an overview of the Part. It is based on section 103 of FA 2006.

1595.     Subsection (1) sets out the “bargain” which is entered into by a group of companies on becoming a UK REIT. If the group meets certain conditions it benefits from an exemption from corporation tax (and, through the operation of clause 520(3), an exemption from income tax for non-UK companies) for profits and gains of property rental business. This benefit comes with the following liabilities:

• an entry charge (clause 538),

• a requirement that the principal company of a group deducts sums representing income tax in respect of distributions made to shareholders (section 973 of ITA and SI 2009/2036), and

• the treatment of such distributions as profits of a UK property business rather than dividend income in the hands of shareholders (clause 548).

1596.     Subsection (2) makes similar provision for companies which enter the UK REIT regime other than as part of a group.

1597.     Subsection (3) contains signposts to the remaining Chapters of the Part.

1598.     Subsection (4) defines “UK REIT”.

Clause 519: “Property rental business”

1599.     This clause defines “property rental business” for the purposes of the Part. It is based on section 104 of, and paragraph 32(2) of Schedule 17 to, FA 2006.

1600.     Subsection (1) defines “property rental business”.

1601.     Subsection (4) provides that, for non-UK companies, business is “property rental business” if it would be property rental business if carried on by a UK company. See clause 521 for the definitions of UK company and non-UK company. This provision ensures that the worldwide property rental business of a non-UK company is treated as property rental business for the purposes of the Part.

1602.     The definition of “tax-exempt business” in section 107(2) of FA 2006 is not rewritten. Instead reference is made to “property rental business” throughout the Bill. This is because “tax-exempt business” suggests that the company must carry on such a business to be within the regime. But clauses 563 and 564 allow a company to breach the conditions in clause 529 or 530 and remain within the regime.

Clause 520: “UK property rental business” of non-UK companies

1603.     This clause defines “UK property rental business” of non-UK companies and treats profits of such business, which would ordinarily be charged to income tax, as chargeable to corporation tax. It is based on paragraph 32(1), (3) and (5) of Schedule 17 to FA 2006.

1604.     Subsections (2) and (3) provide that profits of UK property rental business of non-UK companies (including non-UK joint venture companies) which are subject to income tax under Chapter 3 of Part 3 of ITTOIA are to be treated as being subject to corporation tax (and not income tax).

1605.     Subsections (2) and (3)(a) are needed to bring UK property rental business of non-UK companies within the charge to corporation tax so that provisions such as clauses 534 (tax treatment of profits) and 541 (ring-fencing) apply to all non-UK companies.

1606.     Paragraph 32(3) of Schedule 17 to FA 2006 does not specify whether it is profits and/or gains of UK property rental business which are made subject to corporation tax. The Bill provides that only profits of UK property rental business, which are not already subject to corporation tax, are caught by this section. This approach ensures that gains of non-UK companies with no permanent establishment in the United Kingdom are not brought within the charge to tax in the United Kingdom. See Change 41 in Annex 1.

1607.     In the case of a non-UK company carrying on a UK property rental business, subsections (2) and (3)(b) (based on paragraph 32(5) of Schedule 17 to FA 2006) remove the charge to income tax and replace it with a charge to corporation tax for the purposes of this Part. If the rules in this Part apply, that charge to corporation tax is removed. To the extent that the rules in this Part do not apply, any charge to income tax is undisturbed.

Clause 521: “UK company” and “non-UK company”

1608.     This clause defines “UK company” and “non-UK company” for the purposes of the Part. It is based on section 106(3) of, and paragraph 3(1) of Schedule 17 to, FA 2006.

1609.     Subsection (1) defines “UK company” for the purposes of the Part as a company which is UK resident and is not resident in any other place for the purpose of taxation. A UK company is not the same as a “UK resident” company (which is defined in clause 1119).

Clause 522: “Residual business”

1610.     This clause defines “residual business” for the purposes of the Part. It is based on section 105(3)(c) of, and paragraph 2(c) of Schedule 17 to, FA 2006.

1611.     The reason for the definition of residual business is two-fold. First, it is needed to identify the profits and gains which are charged to corporation tax at the main rate under clauses 534(3) and 535(6). Second, it is needed to identify items to be included in the financial statements in accordance with clause 532(2)(c).

1612.     For non-UK companies the definition of residual business is aligned with the definition used for other members of a group. It is based on paragraph 2(c) of Schedule 17 to FA 2006 which provides that residual business is all business other than property rental business.

Chapter 2: Requirements for being a UK REIT

Clause 523: Notice for a group of companies to become a UK REIT

1613.     This clause provides that, in order to be a “group UK REIT”, the principal company of the group must give notice of entering the UK REIT regime. It is based on sections 106, 109 and 134 of, and paragraphs 5(1) and 8(1) of Schedule 17 to, FA 2006.

1614.     Subsections (1) and (2) provide that a group of companies may give notice for the UK REIT regime to apply from a specified date. If a group notice is given, all 75% subsidiaries of the group (as defined in clause 606) are included in the UK REIT regime. A new accounting period of each company in the group starts on the specified date (see clause 536(5)). That new accounting period is called “accounting period 1” - see clause 609.

1615.     Subsection (3) provides that the principal company of a group may give notice only if it is a “UK company” as defined in clause 521 and it is not an OEIC.

1616.     It is unclear from the source legislation (in particular sections 106(2), 107(1) and 108(1) of FA 2006) whether a group becomes a UK REIT from the date specified in a section 109 of FA 2006 notice or when the various conditions set out in sections 106(2), 107(1) and 108(1) of FA 2006 are satisfied. Subsection (4) addresses this by making it clear that a group becomes a UK REIT from the date specified in the notice given under this clause.

1617.     Subsection (5) defines “group UK REIT” as being a group which has given notice under this clause.

1618.     Section 103(3) of FA 2006, which provides that “a company or group to which this Part applies may be referred to as a Real Estate Investment Trust”, is not rewritten as this expression is not used elsewhere in the legislation.

1619.     Subsection (6) makes clear that merely giving a notice is not enough: the group must also meet the conditions in clause 527.

Clause 524: Notice for a company to become a UK REIT

1620.     This clause provides that, in order to be a “company UK REIT”, the company must give notice of entering the UK REIT regime. It is based on sections 106 and 109 of FA 2006.

1621.     Subsections (1) and (2) provide that a company may give notice for the UK REIT regime to apply from a specified date. A new accounting period of the company starts on the specified date (see clause 536(5)). That new accounting period is called “accounting period 1” - see clause 609.

1622.     It is possible for a company with a 75% subsidiary to give notice under subsection (3) on its own, in which case none of its 75% subsidiaries is included in the UK REIT regime.

1623.     If a company UK REIT gives notice under this clause and subsequently wants an existing 75% subsidiary to be brought within the regime, a group notice under clause 523 needs to be given. The new notice must comply with all the requirements of clause 525.

1624.     If a company UK REIT gives notice under clause 586(2) for a joint venture company to be treated as forming a group UK REIT with the company UK REIT, the notice does not cause any 75% subsidiaries of the company UK REIT to be brought within the regime.

1625.     Subsection (3) provides that a company may give notice only if it is a “UK company” as defined in clause 521 and it is not an OEIC.

1626.     It is unclear from the source legislation (in particular sections 106(2), 107(1) and 108(1) of FA 2006) whether a company becomes a UK REIT from the date specified in a section 109 of FA 2006 notice or when the various conditions set out in sections 106(2), 107(1) and 108(1) of FA 2006 are satisfied. Subsection (4) addresses this by making it clear that a group becomes a UK REIT from the date specified in the notice given under this clause.

1627.     Subsection (5) defines “company UK REIT” as being a company which has given notice under this clause.

1628.     Section 103(3) of FA 2006, which provides that “a company or group to which this Part applies may be referred to as a Real Estate Investment Trust”, is not rewritten as this expression is not used elsewhere in the legislation.

1629.     Subsection (6) makes clear that merely giving a notice is not enough: the company must also meet the conditions in clause 527.

Clause 525: Notice under section 523 or 524: supplementary

1630.     This clause makes supplemental provision about a notice given under clause 523 or 524. It is based on sections 109(2) to (5) and 134(1) of, and paragraph 8(2) of Schedule 17 to, FA 2006.

1631.     Subsection (1) lists what the principal company of a group or a single company must provide in order to give a valid notice under clause 523 or 524.

1632.     Subsection (1)(a) requires the notice to be given in writing to “an officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Clause 526: Duration of status as UK REIT

1633.     This clause provides that once a group or single company becomes a UK REIT, it continues to be a UK REIT until the regime ceases in accordance with clause 571, 572 or 578. It is based on sections 110 and 134(1) of, and paragraph 4 of Schedule 17 to, FA 2006.

Clause 527: Being a UK REIT in relation to an accounting period

1634.     This clause makes it clear that once a notice under clause 523 or 524 has been given, the principal company of a group, or the company, must meet the conditions set out in the remainder of this Chapter in relation to all accounting periods. It is based on sections 106 to 108 and 134 of, and Schedule 17 to, FA 2006.

1635.     Subsection (2)(e) provides that the principal company must prepare and submit financial statements to “an officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Clause 528: Conditions for company

1636.     This clause sets out the conditions which the principal company of a group or, in the non-group case, the company, must meet throughout each accounting period. It is based on section 106(3) to (9) of, and paragraph 3(1) of Schedule 17 to, FA 2006.

Clause 529: Conditions as to property rental business

1637.     This clause sets out the conditions which need to be satisfied by a group or company in respect of its property rental business. It is based on sections 107(1), (3), (4) and (6), of, and paragraph 6(1) of Schedule 17 to, FA 2006.

1638.     Subsections (1) and (2) provide that the “property rental business” (defined in clause 519) must comprise at least three properties with no single property accounting for more than 40% of the total value of the properties involved in the business.

1639.     Subsection (3) provides that, for the purposes of this clause, the property rental business of a group is treated as single business.

1640.     For the purposes of the conditions in subsections (1) and (2), all worldwide properties of non-UK companies are taken into account. This is because paragraph 6(1) of Schedule 17 to FA 2006 provides that “for the purposes of section 107(1) the property rental businesses of the members of the group shall be treated as a single business”.

1641.     Paragraph 32(2) of Schedule 17 to FA 2006 provides that “business carried on by a non-UK resident company is property rental business for the purposes of this Part if the business would be property rental business within the meaning given by section 104 [of FA 2006] if it were carried on by a UK resident company”. So the property rental business includes the worldwide property rental business of non-UK companies. By including the worldwide property rental business of non-UK companies, condition A in clause 529 is easier to satisfy. But condition B in clause 529 may, depending on the circumstances, be more difficult to satisfy, for example where a non-UK company has an overseas property worth more than 40% of the total value of the properties involved in the property rental business.

1642.     Subsection (5) excludes a percentage of the property rental business carried on by a subsidiary which is not wholly owned by the group UK REIT. The percentage is the percentage of the business excluded from the financial statements in accordance with clause 533. See Change 42 in Annex 1.

Clause 530: Condition as to distribution of profits

1643.     This clause sets out the distribution condition which needs to be satisfied by the principal company of a group or, in the non-group case, by a company. It is based on section 107(8) and (9) of, and paragraphs 6(4) and (5) and 32(8) of Schedule 17 to, FA 2006.

1644.     Subsection (1) provides that, in relation to an accounting period of the principal company, the principal company must distribute at least 90% of the group’s “UK profits”.

1645.     Subsection (2) defines “UK profits” as the sum of the profits shown in the financial statements under clause 532(2)(b). Clause 532(3) provides that this is the sum of the profits arising from the property rental business of the UK members of the group together with the profits arising from UK property rental business carried on by non-UK companies. Clause 533(3) confirms that if a non-member of the group holds a percentage of the beneficial interest in a member of a group, that percentage is excluded from the financial statements and so also from the calculation of profits which this clause requires to be distributed.

1646.     Subsection (4) provides that, in relation to an accounting period of a company, the company must distribute at least 90% of profits of the company’s property rental business.

1647.     The distribution requirement in this clause also applies to the relevant proportion of profits generated by joint venture companies (regulations 6(1) and 10(3) of SI 2006/2866). See clause 588(1) which treats a joint venture company as a member of the group UK REIT and clause 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

1648.     The requirement to distribute at least 90% of the group’s “UK profits”, or “profits” in the case of a company UK REIT, does not extend to chargeable gains. This contrasts with section 121 of FA 2006, rewritten in clause 548 (distribution treated as UK property business income in hands of shareholder) and section 973 of ITA (deduction of sums representing income tax at source) which apply to profits and gains of property rental business (or UK property rental business in the case of non-UK companies).

Clause 531: Conditions as to balance of business

1649.     This clause sets out the balance of business conditions which need to be satisfied by a group or company. It is based on sections 108(2) and (3) and 134(1) of, and paragraphs 4 and 7 of Schedule 17 to, FA 2006.

1650.     Subsection (1) provides that at least 75% of the “aggregate profits” of the group or company must relate to property rental business. “Aggregate profits” is defined in subsection (2) for groups and subsection (3) for companies.

1651.     It is not clear from the source legislation whether the balance of business tests should include the worldwide profits and assets of non-UK companies. This clause includes the worldwide profits and assets of non-UK companies for the purposes of the balance of business tests.

1652.     The balance of business test in this clause includes the relevant proportion of property rental business of a joint venture company. See clause 588(1) which treats a joint venture company as a member of a group UK REIT and clause 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

Clause 532: Financial statements for group UK REITs

1653.     This clause sets out the requirements which need to be satisfied for the purposes of clause 527(2)(e). It is based on paragraphs 3(3), 31(2) and 32(8) of Schedule 17 to FA 2006.

1654.     According to paragraph 32(2) of Schedule 17 to FA 2006:

business carried on by a non-UK resident company is property rental business for the purposes of the Part if the business would be property rental business .. if it were carried on by a UK resident company

1655.     It follows that a financial statement required by paragraph 31(2)(a) of Schedule 17 to FA 2006 includes the worldwide property rental business of a non-resident company. This is consistent with the rule about the profits and gains of a UK property rental business in paragraph 32(8)(d) of Schedule 17 to FA 2006.

1656.     So subsection (2)(a) provides that the financial statements should include the worldwide property rental business of the group.

1657.     Subsection (2)(b) provides that the principal company must prepare financial statements for the group’s property rental business in the United Kingdom. Subsection (3) defines the group’s property rental business in the United Kingdom as property rental business carried on by UK companies and UK property rental business of non-UK companies.

1658.     Subsection (2)(c) provides that the principal company must prepare financial statements for the group’s residual business. Financial statements under subsection (2)(c) relate to all business which is not property rental business. For non-UK companies “residual business” includes worldwide business which is not property rental business.

1659.     The requirement to prepare financial statements under subsection (2)(a) and (b) also applies to venturing companies and venturing groups (defined in clause 585) and the relevant percentage of profits of property rental business of the joint venture company. See clause 588(1) which treats a joint venture company as a member of the group UK REIT and clause 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

1660.     Financial statements under this clause exclude any “non-member percentage” (that is, any percentage of the beneficial interest in a member of the group held by a non-member) - see clause 533(3).

Clause 533: Financial statements: supplementary

1661.     This clause sets out further requirements about the preparation of financial statements under clause 532 and also contains a regulation-making power. It is based on paragraphs 31(3) to (7) and 32(8) of Schedule 17 to FA 2006.

1662.     In subsection (4) the expression “equity holder” is not governed by the special definition in clause 598.

1663.     Subsection (5)(c) provides that the Commissioners may make regulations specifying the deadline for submitting a financial statement to an officer of Revenue and Customs. The clause refers to an “an officer of Revenue and Customs” in subsection (5)(c) rather than to “the Commissioners”. See Change 5 in Annex 1.

Chapter 3: Tax treatment of profits and gains of UK REITs

Clause 534: Profits

1664.     This clause sets out the tax treatment of profits of property rental business and residual business. It is based on sections 119 and 134(1) of, and paragraphs 17 and 32(4) of Schedule 17 to, FA 2006.

1665.     Subsection (1) provides that profits of property rental business of a UK company (including a UK joint venture company) which is, or is a member of, a UK REIT are not charged to corporation tax.

1666.     Subsection (2) provides that profits of UK property rental business of a non-UK member of a group UK REIT (including a non-UK joint venture company) are not charged to corporation tax.

1667.     Subsection (3) provides that profits of residual business of a UK company which are charged to corporation tax are charged at a rate determined without reference to the small profits reliefs in clauses 18 to 23 of this Bill: those profits are charged at the main corporation tax rate.

1668.     Subsection (3)(b) makes clear that subsection (3) is not a charging provision. The rule in this subsection applies only if the profits are already charged to corporation tax by another rule.

1669.     Subsection (3) does not apply to non-UK companies (including non-UK joint venture companies). This is because the whole of section 119 of FA 2006 is disapplied by paragraph 17 of Schedule 17 to FA 2006 but only section 119(1) is reinstated by paragraph 32(4) of the Schedule.

1670.     For non-UK companies subject to income tax, the normal tax rule is that they are charged to income tax at the basic rate under Chapter 2 of Part 2 of ITA on profits of residual business.

1671.     Subsection (4) expands what is treated as profits of residual business for the purposes of corporation tax (and so charged to corporation tax at the main rate) to include the non-member percentage of profits which are excluded from the financial statements under clause 533(3).

1672.     Subsection (4) also applies to joint venture companies (including non-UK joint venture companies). So a percentage of profits of property rental business attributable to a non-member of a joint venture company is subject to tax at the main rate of corporation tax.

Clause 535: Gains

1673.     This clause sets out how gains of property rental business and residual business are taxed. It is based on section 124, 127 and 134(1) of, and paragraphs 21 and 32(6) of Schedule 17 to, FA 2006.

1674.     Subsections (1) to (3) and (8) provide that gains made by a company (including a joint venture company) which is, or is a member of, a UK REIT from property rental business are not chargeable gains.

1675.     Subsections (4), (5) and (8) provide that if an asset is used partly for the purposes of property rental business (or UK property rental business in the case of a non-UK company), the gain attributable to the property rental business/UK property rental business is not a chargeable gain. These subsections also apply to joint venture companies.

1676.     Subsection (6) provides that gains of residual business which are subject to corporation tax are charged at the main corporation tax rate.

1677.     Subsection (6)(b) makes clear that subsection (6) is not a charging provision. The rule in this subsection applies only if the profits are already charged to corporation tax by another rule. See Change 41 in Annex 1.

1678.     Subsection (6) also applies to joint venture companies (including non-UK joint venture companies). So a percentage of gains arising from property rental business attributable to a non-member of a joint venture company is subject to tax at the main rate of corporation tax.

1679.     Subsection (7) expands what is treated as gains of residual business (and so potentially subject to corporation tax at the main rate) to include the non-member percentage of gains which are excluded from the financial statements under clause 533(3). Subsection (7) applies also to non-UK companies and non-UK joint venture companies.