GREIT04005 - Tax-exempt income: general

The starting point for computing the profits of the tax-exempt business is the normal Schedule A rules for rental profits from UK property of a company, as set out in section 21A ICTA 1988 (section 120(2) FA 2006). Detailed guidance on Schedule A rules can be found in the Property Income Manual (PIM).

Capital allowances

Capital allowances are deductions in arriving at Schedule A profits, and this rule is followed in calculating the profits of the tax-exempt business. But the rules which allow a company to claim less than the full amount available are set aside – see GREIT04010 for the extent to which these are deducted.

Financing costs

Financing costs and other debits and credits arising from loan relationships and derivative contracts are in general excluded from the calculation of profits for Schedule A purposes. Instead, an aggregate profit on non-trading loan relationships or derivative contracts is charged under Case III, while an aggregate deficit (a non-trading loan relationship deficit) can be set against other profits of the period, or relieved in other ways.

However, in calculating the profits of the tax-exempt business, debits and credits arising from loan relationships, embedded derivative contracts and certain hedging relationships, where in each case they have been entered into for the purposes of the tax-exempt business, are included – see GREIT04020 to 04025.

Overseas property

In working out the profits from overseas property that is part of the tax-exempt business, the Schedule A rules apply in the same way as they do to UK property. This is to ensure consistency between UK and overseas property within the tax-exempt business. Although the computational rules are generally identical, there are one or two minor differences: where this is the case, Schedule A rules must be used. (The main difference is the treatment of furnished holiday lettings, where the part of the rent payable for use of the furniture in UK properties is brought within Schedule A by section 15(1) paragraph 4 ICTA but is not strictly part of the profits of an overseas property business.)

Dual purpose income and expenses

Where an item of income or expenditure relates partly to the tax-exempt business and partly to non tax-exempt businesses, the amount should be apportioned between the two on a reasonable basis (section 120(6) FA 2006).

Disposals by way of trade of tax-exempt business property

Although the majority of disposals of assets used in the tax-exempt business will be capital, there are circumstances when the disposal may amount to trade or adventure in the nature of trade (see GREIT04040 onwards for background on the investment/trading borderline). As the tax-exempt business is restricted to Schedule A and capital gains, where this happens, the asset must leave the ring fence. The disposal is then part of the Schedule D Case I activities of the non tax-exempt business.

For the purposes of the disposal, the property is treated as though it had never been within the ring fence (see GREIT04050 for details of how this achieved) and the company can reclaim any Entry Charge attributable to the property. However, the exclusion from the ring fence does not extend to the rent and associated expenses that arose before the sale, which remain part of the calculation of the profits of the tax-exempt business in the accounting periods up to the date of sale.

Group REITs

The rules outlined above and explained in more detail in GREIT04010 onwards also apply to calculating the profits of the tax-exempt business of each member of a Group REIT that carries on property rental business.