GREIT03020 - Entry to the regime: effects of entry: deemed sale and reacquisition of assets

When the company joins the regime the property rental business of C (pre-entry) (the company before the regime applies to it) is treated as ceasing on the day before it joins. The assets that were involved in C (pre-entry)'s property rental business are treated as though they had been disposed of and reacquired by C (tax-exempt)'s business (section 111(2) FA 2006).

Asset involved in the property rental business

An asset is involved in the property rental business for this purpose if it would be a property involved in the business for the purposes of the Tax-exempt business Conditions in section 107 FA 2006 – see GREIT02020.

This means that the only assets that are sold and reacquired are those that are an estate, interest or right by the exploitation of which the property rental business is conducted. It also means that the same definition of 'property rental business' (see GREIT01020) applies to C (pre-entry) as it does once the company is within the regime. In other words, the assets that are deemed to be sold and reacquired are only those properties that will be involved in the tax-exempt business of C once the regime applies.

Sales and purchases close to the date of entry

Where the purchase is being made under an unconditional contract, the property will be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 109 notice.

Where a sale is being made under an unconditional contract, the property will not be included as an asset involved in the property rental business at the date of entry if the contract date is before the first day of the accounting period specified in the section 109 notice.

For sales and purchases, the later date when the property is conveyed or transferred to the purchaser is not relevant.

If the contract is conditional, the date of disposal is the date all of the conditions are satisfied. For more detail on conditional contracts, see CG14261+.

Capital Gains

The deemed disposal of assets takes place at market value, which takes the same meaning as it does for the purposes of TCGA (section 142(e) FA 2006). This is the price that the assets might reasonably be expected to fetch on a sale in the open market with a willing buyer and seller negotiating on the basis of full information (see CGM16330).

If the deemed sale and reacquisition would result in a gain for C (pre-entry), this is not treated as a chargeable gain for TCGA purposes (section 111(7) FA 2006). If the result is a loss, that loss is not allowable for TCGA purposes.

Companies that join the regime have to be stock exchange-listed. This means that UK listed companies will be following RICS (Royal Institute of Chartered Surveyors) guidelines in valuing the properties on their books, and valuations will therefore be professional and recent. As a rule of thumb, values shown in the published accounts should be a reliable starting point for determining market value for this purpose. For guidance on valuing property, see CGM74000 onwards.

For interactions of commencement provisions and capital gains claims and elections that can be made, see GREIT03100.

Capital allowances

For capital allowance purposes, the transfer takes place at tax written-down value such that no balancing charges or allowances arise to C (pre-entry). The effect of this is that C (tax- exempt)'s business takes over the capital allowance position of C (pre-entry)'s property rental business.

For interactions of commencement provisions and capital allowances claims and elections that can be made, see GREIT03105.

Note that although C (tax-exempt) will not be liable to CT on the profits of its tax-exempt business it must calculate a ‘shadow’ capital allowance claim in order to determine the amount of profits which it must distribute (see GREIT04010 for details).

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). Group members that do not carry on property rental business are not affected by these rules.