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.
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%.
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.
