GREIT03025 - Entry to the regime: entry charge: outline

When a company joins the UK-REIT regime, an Entry Charge of 2% of the market value of the properties that transfer into the tax-exempt business is payable (section 112 FA 2006). The charge is payable at the same time as CT on the profits of the first accounting period of the company after it has joined regime. If the company pays Quarterly Instalment Payments, the Entry Charge should be included in the computations of each instalment for that period.

The mechanism for collecting the Entry Charge is to bring into charge to CT under Schedule D Case VI an amount of notional income calculated in accordance with a given formula. The notional income is treated as arising to C (residual), the part of the company post-entry that carries on any non tax-exempt business of the company. The income is treated as arising on the day the company enters the regime. No losses, expenses or allowances may be set off against this notional income or the tax arising (section 112(4)). For examples of what this means in practice, see GREIT03028.

If the company chooses, it may elect to meet the Entry Charge in four instalments. For detail, see GREIT03028.

Amount of notional income

The amount is 2% of the aggregate market value of properties that are transferred to the tax- exempt business divided by the rate of tax applicable to the company's profits. The formula given in section 116(3) FA 2006 is:

Market Value

This is the aggregate market value of properties treated as sold and reacquired under section 111(2) FA 2006 – see GREIT03020. 'Market value' takes its usual TCGA meaning.

A property transferred to the tax-exempt business may be carried at a negative value – there might for example be an onerous lease or an obligation to clean up a contaminated site before sale. In this case, the asset is ignored in calculating the Entry Charge and its negative value not included in the aggregate.

Tax Rate

This is the rate of tax applicable to the company's profits that are brought into charge in order to collect the Entry Charge. In most cases, this will be the main CT rate as imposed on C (residual) by section 119 FA 2006. Where a group with non-resident members that have UK property joins the regime, the notional income of the non-resident members will instead be chargeable to income tax (paragraph 11 Schedule 17 FA 2006).

Group REITs

The above rules apply to the principal company and any wholly owned subsidiaries at the date the group joins the regime. Where a subsidiary is not wholly owned the market value of the properties it owns is reduced to reflect the level of non-group ownership.