GREIT05005 - Capital gains: general

Exemption from tax of gains on disposals of ring fence assets

As well as exempting property rental income from tax, chargeable gains made on assets that are used in the tax-exempt property rental business are also exempt from tax (section 124 FA 2006). If the disposal of an asset of the tax-exempt business results in a loss, that loss will not be an allowable loss (section 8(2) TCGA 1992).

The amount of gain or loss on disposal of an asset of the tax-exempt business is calculated following the normal rules in TCGA, including indexation. Other terms and expressions used in connection with the calculation also take their meaning and interpretation from TCGA.

Exemption from tax applies to gains on disposal of assets that have been used wholly and exclusively for the purposes of the tax-exempt business throughout their period of ownership (section 124(1)(a) FA 2006). There are extensions to this rule to deal with assets that have been used partly or wholly for non tax-exempt purposes (see GREIT05010), including a de minimis rule for assets where non tax-exempt use has been insignificant.

Where an asset moves into or out of the ring fence, there is a deemed sale and reacquisition at market value – see GREIT03020 for more detail.

Taxation of gains on disposal of non ring fence assets

Gains made on assets used for non tax-exempt business of the company are taxable at the main CT rate (small companies rates are not available to UK-REITs) (section 124(3) FA 2006).

Part of an asset used wholly and exclusively for one class of business

If part of an asset is sold and that part had been used wholly and exclusively for the tax- exempt business, then the gain arising on that part is exempt from tax. Exemption applies whether the part retained is used for the tax-exempt or other business of the company. This is because section 142 FA 2006 treats references to ‘asset’ in the UK-REIT rules to include reference to part of an asset.

This means that part disposals by a single company REIT, or by a company forming part of a Group REIT, need not follow the usual section 42 TCGA rule. The capital gains cost of the asset sold should be calculated by reference to a reasonable apportionment of the cost of the larger asset.

Application of TCGA rules to UK-REITs

Apart from the part-asset treatment described above, normal TCGA rules apply to computing the quantum and timing of gains arising on disposal of assets used in both the tax-exempt and the taxable activities of a UK-REIT. For example, where ‘market value’ is used in sections 124 to 126 FA 2006, the phrase takes its meaning from section 272 TCGA , as the price which an asset might reasonably be expected to fetch on a sale in the open market.

There are some differences where assets have had mixed use prior to disposal (see GREIT05010), in the application of section 171 TCGA (transfers within a group) for single company UK-REITs that have 75% subsidiaries (see GREIT09100]) and, for Group REITs, sections 171 and 171A TCGA (actual or notional transfers of assets within a group) and sections 179A and 179B TCGA (reallocation or roll-over of gains within a group).

Although not affecting the capital gains of the UK-REIT itself, UK-REIT shares are added to the list of investments covered by the special rule in section 212(1) ICTA (annual deemed disposals of holdings of certain assets) for the long term funds of insurance companies (see GREIT09025).