GREIT04505 - Non tax-exempt income: general

The company can carry on up to 25% activities that are not qualifying property rental business, as defined in section 104 FA 2006. There is no restriction on what these activities might be, and the general rule is that the profits of these non ring-fence activities are computed according to the normal rules of the appropriate Schedule or Case of charge.

The main difference is that profits from other activities are chargeable to tax at the main CT rate: small companies rates are not available to UK-REITs, either as single companies or for members of a Group REIT (section 119(2) FA 2006).

Division between taxable and tax-exempt activities

The UK-REIT legislation operates by defining the activities that lie within the tax-exempt ring fence, and any other activity is then outside and taxable. With some exceptions listed in Schedule 16 FA 2006, ring fence activities are property rental business, both UK and overseas. For further information on which activities qualify for the ring fence, see GREIT02020 onwards.

Having identified the activities that give rise to tax-exempt income, the legislation provides that gains that arise on disposal of assets that are involved in generating the tax-exempt income are also exempt from tax. The computation of gains is dealt with at GREIT05000 onwards.

There are two exceptions to the rule that disposals of assets of the tax-exempt business are tax-free. One is the disposal of ring fence properties within 3 years of completion of a development. The other is where a ring fence property is disposed of by way of trade. In both cases, the transaction is treated as though the assets had never been in the ring fence. Any profit, gain or loss arises in the taxable part of the company. The rental income and associated expenses that have included in the tax-exempt business profits are left undisturbed – see GREIT04050 for more detail.

Ring fence

Within the company, a ring fence operates to prevent the use of losses, allowances and deficits that arise in the tax-exempt part of the company (deemed to be a separate company for tax purposes) being used to reduce profits or gains arising in the taxable part of the company. The ring fence also operates in the other direction, to prevent losses etc arising in the taxable part of the company being used in the tax-exempt part of the company.

For Group REITs, there are similar ring fencing provision that prevent use of losses etc by way of group relief between the taxable part of one group member and the tax-exempt part of another group member.

Mixed purpose income, expenses etc

Because the tax-exempt business of a UK-REIT is deemed to be a separate business, carried on by a separate company, the normal rules for dealing with items that relate to separate persons and separate businesses carried on by the same person will operate to apportion them between the taxable and tax-exempt parts of the company.

For the avoidance of doubt however, the treatment is affirmed by section 120(6) FA 2006, which provides that where income, expense etc relate partly to tax-exempt business and partly to non tax-exempt business, the amounts are required to be apportioned reasonably between the two.