GREIT04015 - Tax-exempt income: capital allowances: assets that move across the ring fence

A company may decide to change the use of a property from being part of its tax-exempt business to being part of its non tax-exempt activities or vice versa. A transfer from the tax- exempt business is treated as a disposal by C (tax-exempt) and an acquisition by C (residual). A transfer into the tax-exempt business is treated as a disposal by C (residual) and an acquisition by C (tax-exempt) (section 125(2) and 126(2) FA 2006).

The general rule (in section 125(4)(a)(i) and 126(4)(a)(i) FA 2006), for either direction of transfer, is that the asset is transferred at tax written-down value for CAA purposes (but note that market value applies for TCGA purposes). Stand-in-shoes treatment applies to the ‘new owner’.

For example, company C may decide to use as its own headquarters offices that were previously rented out to unconnected tenants. Any plant and machinery or fixtures in the property will transfer from being assets of the tax-exempt business to being non ring-fence assets. For CAA purposes, the transfer takes place at a value that gives rise to neither balancing charges nor allowances for C (tax-exempt).

Section 198 and 199 CAA elections

Although the transfer is treated as a disposal, section 125(4)(a)(ii) and 126(4)(a)(ii) FA 2006 do not allow section 198 or 199 CAA elections to be made in respect of the transfer.

Transfers of part of an asset

The transfer across the ring fence rules apply also to part disposals of an asset, since references to assets are deemed to be references to part of an asset as well for the purposes of tax-exempt UK-REIT legislation (section 142(a) FA 2006).

For example, company C decides to hot-desk administrative staff and can therefore release two floors of its ten storey headquarters for letting to an unconnected tenant. The WDV of the building’s air conditioning is 100. When the two storeys move to the tax-exempt business, they take with them WDV of 20.

Group REITs

These rules apply where the assets transfer from the tax-exempt part of one group member to the residual part of the same group member, or to the residual part of a different group member. They also apply where an asset transfers from the residual part of one group member to the tax-exempt part of the same or of a different group member.