Chapter 4: Entering the UK REIT regime

Clause 536: Effects of entry: corporation tax

1680.     This clause provides that, for corporation tax purposes, when a company (including a joint venture company) enters the UK REIT regime its property rental business ceases and recommences and it is deemed to sell and reacquire the assets involved in that business. This clause is based on sections 111 and 134 of, and paragraphs 9, 10 and 33 of Schedule 17 to, FA 2006.

1681.     Subsection (1) provides that property rental business (or UK property rental business of non-UK companies) carried on before entry to the UK REIT regime is treated as ceasing at entry for the purposes of corporation tax. As clause 520(3) provides that profits of UK property rental business of non-UK companies are treated as liable to corporation tax, this clause applies to all companies whether or not UK resident. See Change 41 in Annex 1.

1682.     Subsections (2) to (4) provide that, for the purposes of corporation tax, assets involved in property rental business (or UK property rental business of non-UK companies) immediately before entry to the UK REIT regime are treated as being sold and reacquired at market value on entry. Any resulting gain is not chargeable to corporation tax. The only non-UK companies affected by this rule are those that are resident both in the United Kingdom and in another territory. See Change 41 in Annex 1.

1683.     The final words of subsection (2)(b) ensure that the reacquired assets are held by the company within the UK REIT regime.

1684.     Subsection (5) provides that, for corporation tax purposes, an accounting period ends and begins again on entry to the regime. The subsection also applies to non-UK companies. See Change 41 in Annex 1.

1685.     Subsection (6)(a) provides that if a percentage of the assets of a member of a group UK REIT is excluded from the financial statements because that percentage is attributable to a non-member, the percentage is ignored for the purposes of subsection (2).

Clause 537: Effects of entry: CAA 2001

1686.     This clause is supplementary to clause 536 and modifies how CAA operates when a company (including a joint venture company) enters the UK REIT regime. It is based on sections 111(4) and 134(1) of, and paragraph 9 of Schedule 17 to, FA 2006.

Clause 538: Entry charge

1687.     This clause provides for an amount of notional income (calculated in accordance with clause 539) to be chargeable to tax on a company on entry to the UK REIT regime. It is based on sections 112(1), (2) and (4) and 134(1) of, and paragraphs 11 and 33 of Schedule 17 to, FA 2006.

1688.     Subsection (2) provides that the notional amount is treated as arising in the company’s residual business. This ensures that the amount is not treated as arising in the company’s property rental business and so not chargeable to tax.

1689.     It is not clear from section 112(2) of FA 2006 what rate of tax applies to UK joint venture companies. And SI 2006/2866 does not specify the rate of tax applicable for the purposes of section 112 of FA 2006. Subsection (3) of this clause and clause 539(5)(a) make it clear that UK joint venture companies are treated in the same way as other UK companies and consequently the rate of tax used is the rate used in clause 534(3).

1690.     From a practical point of view, this has no effect as the entry charge remains 2% of the market value of assets involved in UK property rental business.

1691.     Subsection (4) provides that non-UK companies (including non-UK joint venture companies), are chargeable to income tax on the notional amount at the basic rate under section 11 of ITA.

Clause 539: Calculation of the notional amount

1692.     This clause sets out how to calculate the amount of notional income for the purposes of clause 538. It is based on sections 112(3) and 134(1) of, and paragraphs 9(4), 10(2) and 11(1) of Schedule 17 to, FA 2006.

1693.     Subsection (3) defines “MV” as the total market value of assets which are involved in property rental business of the company (or UK property rental business in the case of non-UK companies) immediately before entry to the UK REIT regime.

1694.     Subsection (4) provides that if a percentage of the assets is excluded from the financial statements because it is attributable to a non-member, that percentage is ignored for the purposes of “MV”.

1695.     Subsection (5)(a) defines “TR” for UK companies as the rate mentioned in clause 534(3) (the main rate of corporation tax).

1696.     Subsection (5)(b) defines “TR” for non-UK companies (including non-UK joint venture companies) as the basic rate of income tax.

Clause 540: Election to treat notional income as arising in instalments

1697.     This clause provides that a company (including a joint venture company) may elect to pay the entry charge in instalments. It is based on sections 112(5) to (7) and 134(1) of, and paragraph 11(1) of Schedule 17 to, FA 2006.

1698.     Subsection (3) refers 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.

Chapter 5: Assets etc

Clause 541: Ring-fencing of property rental business

1699.     This clause provides that, for corporation tax purposes, property rental business (or UK property rental business in the case of non-UK companies) is treated as a separate business from any other business carried on by a group UK REIT or by a company UK REIT. Also, to the extent that the UK REIT carries on such a business, it is treated as a separate group or company from the rest of the group or company. This clause is based on sections 113(1) to (4) and 134(1) of, and paragraphs 12 and 32(3) of Schedule 17 to, FA 2006.

1700.     Subsections (1) and (8) provide that this clause applies to a group UK REIT, each member of the group (including a non-UK company) and a company UK REIT. See Change 41 in Annex 1.

1701.     This clause ring-fences the property rental business, rather than the “tax-exempt business”. This avoids the problem of how the clause applies in a case where the company or group breaches the property rental business conditions in clause 529. Such a breach apparently leads to the company or group no longer having “tax-exempt business” for the purpose of section 113 of FA 2006.

1702.     This clause applies to joint venture companies (including non-UK joint venture companies which are subject to corporation tax).

1703.     Subsection (7) provides that if a percentage of the profits of property rental business are excluded from the financial statements because they are attributable to a non-member, that percentage is treated as profits of residual business.

Clause 542: Disapplication of certain provisions

1704.     This clause applies to UK companies and allows losses from overseas property rental business to be used against other property rental business income and disapplies the exemption from the transfer pricing rules for small and medium sized enterprises. It is based on sections 113(5) and (6) and 134(1) of, and paragraph 12(2) of Schedule 17 to, FA 2006.

1705.     Subsection (1) provides that clause 66 of this Bill (ring-fencing of losses from overseas property business) does not apply to property rental business of a UK company (including a UK joint venture company). The rule applies only to UK companies because non-UK resident companies are not subject to United Kingdom tax on the profits of an overseas property business.

1706.     Subsection (2) provides that clauses 166 to 171 of TIOPB (transfer pricing: exemption for small and medium sized enterprises) do not apply to a UK company. This means that all UK companies regardless of size, which are subject to this Part, are subject to the transfer pricing rules.

Clause 543: Profit: financing-cost ratio

1707.     This clause provides that if the result of the sum specified in subsection (2) is less than 1.25, “the excess” calculated in accordance with subsection (3) is charged to corporation tax. It is based on sections 115(1) to (3) and 134(1) of, and paragraph 4 of Schedule 17 to, FA 2006.

1708.     This clause enacts regulations 12 and 13 of SI 2006/2864. See Change 43 in Annex 1.

1709.     Subsection (2) sets out the formula to calculate the ratio used to arrive at the “excess” in subsection (3). The definitions of “PP” and “PFC” refer to “property profits” and “property financing costs” and are defined further in clause 544.

1710.     This clause applies to the relevant proportion of a joint venture company’s property profits and property financing costs in the same way as for any other member of a group UK REIT. See Change 43 in Annex 1.

1711.     Subsection (3) provides that the difference between the actual property financing costs of the UK REIT and the amount that would cause the sum specified in subsection (2) to be 1.25 (“the excess”), is charged to corporation tax. Subsections (4) and (5) provide that the excess amount is treated as if it were profits of residual business of the principal company of a group UK REIT or a company UK REIT. This means that the rate of tax is the main rate of corporation tax as mentioned in clause 534(3).

Clause 544: Meaning of “property profits” and “property financing costs”

1712.     This clause defines “property profits” and “property financing costs” for the purposes of clause 543. It is based on sections 115(2) and (4), 120(1) and 134(1) of, and paragraphs 3 and 14 of Schedule 17 to, FA 2006.

1713.     Subsections (1) and (3) define “property profits” and “property financing costs” respectively for the purposes of clause 543.

Clause 545: Cancellation of tax advantage

1714.     This clause provides that an officer of Revenue and Customs may counteract a tax advantage obtained by a company which is, or is a member of, a UK REIT (including a joint venture company) if the officer thinks that the company has tried to obtain a tax advantage. It is based on sections 117(1) to (5) and 134(1) of, and paragraph 15(1) of Schedule 17 to, FA 2006.

1715.     Subsections (1), (4) and (6) refer 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.

1716.     Subsection (3) sets out how a tax advantage may be counteracted. Subsection (3)(a) provides that an assessment may be made on the company. For non-UK companies, such an assessment may be to income tax or corporation tax.

1717.     Subsection (4) provides that an officer of Revenue and Customs may assess (in addition to the assessment mentioned in subsection (3)(a)) a UK REIT to an amount of tax to cancel out the tax advantage.

Clause 546: Appeal against notice under section 545

1718.     This clause provides that a company which is, or is a member of, a UK REIT (including a joint venture company) may appeal against a notice given under clause 545. It is based on section 117(6) to (8) and 134(1) of, and paragraph 15(2) of Schedule 17 to, FA 2006.

1719.     Subsection (2) refers 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 547: Funds awaiting reinvestment

1720.     This clause determines how cash proceeds from the sale of assets used for property rental business are treated. It is based on sections 118 and 134(1) of, and paragraph 16 of Schedule 17 to, FA 2006.

1721.     Subsection (1) provides that the clause applies if a company which is, or is a member of, a UK REIT disposes of an asset used wholly and exclusively for the purposes of property rental business and holds the proceeds in cash.

1722.     Section 118 of FA 2006 applies to a company that disposes of an asset and holds cash. Section 134 of FA 2006 applies the rule to a group as it applies to a company. A group cannot dispose of an asset but it may hold cash. There is no justification in section 134 of FA 2006 for saying that the cash has to be held in a particular place in the group.

1723.     So this clause refers to a member of a group disposing of an asset but makes clear that the proceeds may be held within the group by a company different from that which disposed of the asset.

1724.     Subsection (5) deals with assets that have had mixed use. The “wholly and exclusively” rule in subsection (1)(a) is relaxed for periods of mixed use that are of at least one year. The clause applies the one year test to the aggregate of the periods of mixed use.

1725.     This clause also applies to:

• the worldwide property rental business of non-UK companies; and

• joint venture companies (including non-UK joint venture companies).

Chapter 6: Distributions

Clause 548: Distributions: liability to tax

1726.     This clause provides that distributions of profits and gains of property rental business in the United Kingdom are treated as income of a UK property business rather than as dividend income in the hands of the shareholder. It is based on sections 121(1), (2) and (8) and 134(1) of, and paragraphs 18(1) and (3) and 32(8) of Schedule 17 to, FA 2006.

1727.     Subsections (1) and (3) provide that the section applies to a distribution of “profits or gains (or both)”. This is reflects the inclusion of gains by section 121(8)(b) of FA 2006. The inclusion of gains here contrasts with the rule in clause 530 (the distribution of profits test), where the test is concerned only with the (income) profits of property rental business.

1728.     Subsection (5) provides that if the shareholder is within the charge to corporation tax, the distribution is treated as profits of a UK property business. So the income falls within Part 4 of CTA 2009. Section 931W(2) of CTA 2009 ensures the distribution is not charged to tax under Part 9A of CTA 2009.

1729.     Subsection (6) (which is based on section 121(1)(b) of FA 2006) provides that if the shareholder is within the charge to income tax, the distribution is treated as profits of a UK property business. So the income falls within Part 3 of ITTOIA. Section 366(2) of ITTOIA ensures that the distribution is not treated as savings and investment income (including dividends).

1730.     Section 121(2)(a) of FA 2006 is not rewritten because it deals with a case (non-UK resident company within the charge to corporation tax) that is already covered by section 121(1)(a) (shareholder within the charge to corporation tax).

1731.     Section 121(2)(b) of FA 2006 is not rewritten because it deals with a case (non-UK resident not within the charge to corporation tax) that is already covered by section 121(1)(b) (shareholder within the charge to income tax).

1732.     Subsection (7) provides that in the case of a non-UK resident shareholder, a distribution is not subject to a duty to deduct at source in accordance with regulations made under section 971 of ITA. Schedule 1 to this Bill amends section 972(6) of ITA so that it refers to this subsection.

Clause 549: Distributions: supplementary

1733.     This clause makes further provision about clause 548. It is based on sections 121(3) to (7) and 134(1) of, and paragraphs 18(1) and (2) and 32(8) of Schedule 17 to, FA 2006.

1734.     Subsection (1) provides that clause 548 does not apply to certain types of shareholders.

1735.     Subsection (2) (together with subsection (3)) provides that neither section 397 of ITTIOA nor clause 1109 of this Bill (tax credits in respect of (exempt) qualifying distributions) do not apply to distributions made by the principal company of a group UK REIT or by a company UK REIT of profits or gains (or both) of property rental business.

1736.     Section 121(8)(b) of FA 2006 applies only to section 121(1) of FA 2006. So it is arguable that it does not apply to the rule in section 121(5). But subsection (4) of this clause applies to the same distributions (including distributions of gains) as are dealt with by clause 548.

1737.     Subsection (4) provides that relevant distributions (as defined in subsection (3)) are treated as profits of a single business separate from the businesses mentioned in subsection (5).

Clause 550: Attribution of distributions

1738.     This clause sets out how distributions are attributed between the property rental business of a UK REIT and any other business. It is based on sections 123 and 134(1) of, and paragraph 20 of Schedule 17 to, FA 2006.

Clause 551: Tax consequences of distribution to holder of excessive rights

1739.     This clause sets out the tax consequences of a distribution made to a “holder of excessive rights” (defined in clause 553) if the distributing company has not taken steps to prevent it. It is based on section 114 of, and paragraph 13 of Schedule 17 to, FA 2006.

1740.     This clause enacts regulation 10 of SI 2006/2864. See Change 43 in Annex 1.

1741.     Subsections (1) to (3) provide that when a distribution is made to a holder of excessive rights and the distributing company has not taken reasonable steps to prevent its being made, the distributing company is treated as receiving an amount of income calculated in accordance with clause 552.

1742.     Subsections (4) to (6) provide that the amount is charged to corporation tax as if it were profits of residual business of the distributing company. This means that the rate of tax is the main rate of corporation tax as mentioned in clause 534(3).

Clause 552: “The section 552 amount”

1743.     This clause sets out how the “section 552 amount” is calculated for the purposes of clause 551. It is based on section 114(2) of, and paragraphs 2 and 13 of Schedule 17 to, FA 2006.

1744.     This clause enacts regulation 10 of SI 2006/2864. See Change 43 in Annex 1.

1745.     Subsections (2) and (3) define “DO” (distribution in respect of ordinary shares) and “DP” (distribution in respect of preference shares) for a group UK REIT by reference to the group’s “UK profits” (as defined in clause 530(2)). For a company UK REIT, “DO” and “DP” are defined by reference to the “profits of property rental business of the company”.

Clause 553: Meaning of “holder of excessive rights”

1746.     This clause defines “holder of excessive rights”. It is based on section 114(1) and 134(1) of, and paragraph 13 of Schedule 17 to, FA 2006.

1747.     This clause enacts regulation 1(2) of SI 2006/2864. See Change 43 in Annex 1.

Clause 554: Regulations: distributions to holders of excessive rights

1748.     This clause allows the Treasury to make regulations dealing with distributions made to holders of excessive rights. It is based on section 114 of, and paragraph 13 of Schedule 17 to, FA 2006.

1749.     The clause reproduces neither the general regulation-making power in section 114(1) nor the specific power in section 114(2)(a) of FA 2006. See Change 43 in Annex 1.

Chapter 7: Gains etc

Clause 555: Assets: change of use

1750.     This clause sets out how gains made on the disposal of an asset used in property rental business (or UK property rental business of non-UK companies) are treated. It also makes provision for repayment of a proportion of the entry charge in certain circumstances. It is based on sections 125 and 134 of, and Schedule 17 to, FA 2006.

1751.     Subsections (1) to (3) and (7) apply if an asset which has been used wholly and exclusively for the purposes of property rental business (or UK property rental business in the case of non-UK companies) begins to be used for the purposes of residual business. The asset is deemed to be sold and reacquired at market value. In accordance with clause 535(1) any resulting gain is not a chargeable gain.

1752.     Subsection (4) provides that any sale and reacquisition under subsection (2) is at written down value for the purposes of CAA.

1753.     Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains is treated as gains of residual business.

1754.     This clause also applies to joint venture companies, including non-UK resident joint venture companies (see clause 588).

Clause 556: Disposal of assets

1755.     Subsections (1) to (3) and (6) deal with the case where an asset which has been used wholly and exclusively for the purposes of the property rental business (or UK property rental business in the case of non-UK companies) is disposed of in the course of a trade. Usually such a disposal takes place some time after the asset has been removed from the company’s property rental business (when there was a deemed disposal and reacquisition under clause 555(2)).

1756.     Subsection (2) provides that the deemed disposal and reacquisition under clause 536(2) is ignored. Instead the asset is treated as disposed of in the course of the company’s residual business. In accordance with clause 535(6) any resulting gain which is subject to corporation tax is taxed at the main rate of corporation tax.

1757.     Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains is treated as gains of residual business.

1758.     This clause also applies to joint venture companies, including non-UK resident joint venture companies (see clause 588).

Clause 557: Movement of assets into ring fence

1759.     This clause provides that if an asset used by the residual business of a company (including a non-UK company) begins to be used by the company for the purposes of property rental business (or UK property rental business, in the case of a non-UK company), it is treated as disposed of and reacquired at market value. It also provides that, for the purposes of CAA, the transfer of the asset is treated as made at the tax written-down value. It is based on sections 126 and 134(1) of, and paragraphs 21 and 32(6) of Schedule 17 to, FA 2006.

1760.     In accordance with clause 535(6), if a gain arises under this clause and the gain is subject to corporation tax, it is charged at the main rate.

1761.     Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains are treated as gains of a residual business.

1762.     This clause also applies to joint venture companies, including non-UK resident joint venture companies (see clause 588).

Clause 558: Demergers: disposal of asset

1763.     This clause makes provision for a company UK REIT to dispose of an asset to a 75% subsidiary which subsequently becomes a member of a group UK REIT. It is based on section 126A of FA 2006.