When an asset that has been used in the non tax-exempt business
of a company changes use to tax-exempt business, there is a deemed
sale by the non tax-exempt business (C (residual)) and
reacquisition by the tax-exempt business, C (tax-exempt) (section
126(2) FA 2006). Any gain or loss crystallised by the deemed sale
accrues to C (residual) and is chargeable to tax at the main CT
rate (small companies rates are not available to UK-REITs –
section 124(3) FA 2006.)
The deemed sale and reacquisition take place at market value,
where market value takes its normal section 272 TCGA meaning as the
price which an asset might reasonably be expected to fetch on a
sale in the open market (this is different from the sale proceeds
for capital allowances purposes – there, the tax written-down
value is used – see
GREIT04015.) This market value is the
base cost for TCGA purposes for the asset for any future
disposal.
If part of an asset that is used wholly and exclusively for the
purposes of the non tax-exempt business is transferred into the
ring fence, the gain or loss is treated in the same way as if an
entire asset had been transferred. This is because section 142 FA
2006 treats references to an asset in the UK-REIT rules to include
reference to part of an asset.
This means that there will be an immediate chargeable gain or
loss to C (residual) even if a distinct part of what would normally
be considered a single asset for chargeable gains purposes was
already being used for exempt activities. The gain arising will be
calculated by reference to the market value of the part being
transferred and a reasonable apportionment of the cost of the asset
as a whole.
As an example: If a property had been used by the company for
administration (a residual use) and one third of it is subsequently
let to an unconnected party then that third will move to within the
ring fence. At that point the transfer of one third of the property
to the tax- exempt business takes place at its market value and a
chargeable gain will accrue to C (residual).
In calculating the chargeable gain arising to C (residual) an
appropriate proportion of the base cost of the whole asset needs to
be taken into account. The appropriate proportion can be worked out
by following the principles in section 42 TCGA.
Where an asset is in mixed use but it is not possible to identify separate parts as relating to the exempt and taxable activities, then an apportionment of the gain will be needed when it is disposed of by the company (section 124(2) FA 2006 see GREIT05010).
