GREIT09015 – Miscellaneous: indirect ownership of property: Balance of business Conditions

The Balance of business conditions are a hurdle the group or company has to pass to join and remain in the regime. For Group REITs, accountancy concepts are used to determine the treatment of income, expenses and asset values where the property is held by an entity other than a member of the TCGA group. For deciding if the income and gains arising on indirectly held property are tax-exempt or whether Entry Charge is payable, see GREIT09020 and GREIT09025.

Group REITs: accountancy rules for other entities

For the Balance of business conditions, the 75/25 comparison of income and asset values is generally by reference to accountancy measures and the accountancy concept of group consolidated accounts. For example, intra-group transactions and balances are ignored. An accountancy approach is also taken to deciding when the assets, income etc are consolidated on what amounts to a line-by-line basis, rather than including the value of group members’ interests in the entity as a balance sheet asset. The accountancy approach is based on the level of influence group members have in the entity, and not by reference to whether or not the entity is transparent.

This principle translates into taking account of the underlying income and assets of entities where the group has significant influence. For the purposes of the UK-REIT rules, this is where group members’ interest in the entity is more than 20%. Where the group’s influence is not significant, the value of the group’s interest in the entity counts as a non-ring fence asset.

The consequence of this 20% cut-off is that some entities that are tax-transparent (for example partnerships) will be treated as opaque if the group has less than 20% interest in it. However, this treatment for the Balance of business Conditions does not determine the tax treatment of property income and gains on disposals of the entity’s assets, nor the incidence of the Entry Charge.

The exception to the level of influence test is for companies that are not members of the TCGA group. The value of the group’s interest counts as a non-ring fence asset, even if the interest is more than 20%.

Single company UK-REITs and other entities

Apart from where there is a Joint Venture Look-Through notice in place, a single company UK- REIT does not prepare financial statements that consolidate activities across the entities in which it has an interest. In this case, the Balance of business Conditions take account of the legal nature of the vehicle and do not differentiate between interests in the entity above or below 20%. For example, if a single company UK-REIT has a 15% interest in a partnership, 15% of the income and assets of the partnership are included in the Balance of business asset and income tests. If the single company UK-REIT has an 85% interest in a company, the income and assets of the company are not included in the Balance of business asset and income tests: the value of the shareholding counts as a non ring-fence asset.