GREIT03015 - Entry to the regime: effects of entry: cessation of business and accounting period

On joining the regime, a line is drawn between the property rental activities of the company before entering the regime, and those that are carried on and exempt from tax while the company is within the regime. This is done in two ways: one is to deem the pre-REIT property business of the company to cease for tax purposes; the other is to cause the accounting period of the company to come to an end for CT purposes on joining the regime.

Cessation of pre-REIT property business

At entry, the property businesses (UK and overseas) of the company are treated as ceasing (section 111(1) FA 2006). This means that the property business carried on by the company once it has joined the regime is a newly set up and commenced business for tax purposes. This deemed cessation does not however apply to the other activities carried on by the company.

Effect of cessation on losses

Losses etc relating to the property businesses pre-entry cannot be carried forward for use in working out the profits of the tax-exempt business. Neither can losses arising in the first accounting period of tax-exempt business be carried back to reduce profits of accounting periods before it joined the regime.

To the extent that the company carried on activities other than property rental, these are regarded as a business that carries on uninterrupted, before, during and after the company is in the regime. If the company had a Case I loss in the final accounting period before it joins the regime, that loss can be carried forward in the normal way and used against profits of the trade as carried on by C (residual) after the company has joined the regime – see GREIT03105.

If the company has unused capital losses, even if they arose on pre-entry disposals of rental property, they can be carried forward and used to reduce chargeable gains that may arise to C (residual) or C (post-cessation) – see GREIT03100.

One accounting period ends/ new one begins – section 111(5) FA 2006

When the company joins the regime, one accounting period of the company comes to an end. This is the final accounting period for C (pre-entry). A new accounting period starts on the first day the regime applies to the company. This is the first accounting period of C (tax- exempt) and of C (residual).

Note that 'accounting period' is a term used for computing profits and assessing CT, and is defined in section 12 ICTA. It is not necessarily the same period as the interval between two accounting dates. Although an 'accounting period' always comes to an end on an accounting date, there are several occasions when a new accounting period starts between two accounting dates. The requirement for a new accounting period to begin applies only for CT purposes: there is no requirement that the company changes the date to which it draws up its accounts to reflect the new accounting period for CT purposes.

Group REITs

The above rules apply to each member of the company, including the principal company, carrying on property rental business at the date the group enters the regime (see GREIT11200 for more detail).