GREIT04010 - Tax-exempt income: capital allowances: general
The income of the tax-exempt business is based on the
computation of profits for Schedule A purposes. One element in
arriving at the profit is capital allowances, and normally, a
company has to make a claim for the amount of capital allowances it
wants to deduct in the period (section 3(1) CAA).
The section 3(1) CAA requirement to claim and the choice of
how much to claim are set aside in calculating the income of the
tax-exempt business (section 120(7) FA 2006). Instead, the maximum
allowances available under CAA must be taken into account in the
calculation of the profits of the tax-exempt business.
This means that a capital allowances 'shadow' regime
operates within the tax-exempt business. The result of this is that
capital allowances are taken into account in calculating the
profits of the tax-exempt business and thus have the effect of
reducing the distribution to, and so also the tax liability of,
shareholders. Shareholders receive a distribution from the profits
of the tax-exempt business after capital allowances: there are no
provisions that allow shareholders to access directly capital
allowances on tax-exempt business assets.
Otherwise, apart from some modifications when the company
joins or leaves the regime, and when assets move from one side of
the ring fence to the other (see
Greit04015), all the normal capital
allowance rules apply to the tax-exempt business. For more
information see the Capital Allowances Manual. Apart from on
joining and leaving the regime, and on transfers across the ring
fence, this includes the ability to make section 198 and section
199 CAA elections to apportion the sale price between fixtures and
property when a property is disposed of or acquired by the
company.
Opening book values
When the company joins the regime, the tax-exempt business takes
over the capital allowance position of the company’s property
rental business as at the end of the accounting period before it
joined, as set out in section 111 FA 2006. This is on a
‘stand-in-shoes’ basis, at values that result in no
balancing charge or allowance rising to C (pre-entry), and provides
the opening values for tax-exempt business assets on which
‘shadow’ capital allowances must be calculated.
This specification of the transfer values in section 111
means that section 198 and section 199 CAA elections cannot be made
on entry to the regime.
Dual purpose assets
If plant or machinery is used partly for the purposes of the tax-exempt business and partly for other activities, the qualifying expenditure should be apportioned between the two on a reasonable basis. This follows partly from the concept within the UK-REIT regime of references to assets being also references to part of an asset (section 142(a) FA 2006) and partly from section 121(6), which apportions dual purpose expenditure on a reasonable basis.
Other activities of the company
Other than rules that determine allowances and charges when assets are transferred across the ring fence (see GREIT04015), there are no special capital allowances rules that apply to the non tax-exempt part of the company. When the company joins the regime, there is no deemed sale and reacquisition of non ring-fence assets, and thus no special rules to determine carry forward etc values: similarly if the company leaves the regime.
Group REITs
These rules apply to each member of a Group REIT to the extent that it carries on a qualifying property rental business.
