GREIT11215 - Groups: entry to the regime: effects of entry: cessation of business, accounting periods, losses and deemed sale and reacquisition of assets
On joining the regime, a line is drawn between the property rental activities of each group member before entering the regime, and those that are carried on and exempt from tax while the company is a member of a group that is within the regime. This is done in two ways: one is to deem the pre-REIT property business of each company to cease for tax purposes; the other is to cause the accounting period of each company to come to an end for CT purposes on joining the regime.
Where a company joins the group after the section 109 notice comes into effect, the same rules apply to the business, accounting periods and assets owned by the new group member.
Cessation of business, accounting periods and pre-entry losses
The rules outlined in GREIT03015 apply to the pre-entry business, pre-entry losses and accounting periods of each company that is a member of the group at the date it joins the regime. This is a consequence of the modifications in paragraph 9(1) and (3) Schedule 17 to the rules for single company UK-REITs in section 111(1) and (5) FA 2006.
The allowability or otherwise of pre-entry losses etc is shown in tables at GREIT03100 (for capital losses) and GREIT03110 (for everything else).
Deemed sale and reacquisition of assets
The assets that were involved in the property rental business of each company before the group joined the regime are treated in the same way as the assets of C (pre-entry), as described in GREIT03020. This is a consequence of the modifications in paragraph 9(2) Schedule 17 to the rules for single company UK-REITs in section 111(2) and (3) FA 2006.
For capital gains purposes, the deemed transactions are at market value, and any gain or loss on entry to the regime is ignored for tax purposes. For capital allowance purposes, the transfers take place at tax written-down value such that no balancing charges or allowances arise.
Note that although the profits of the tax-exempt business of each member of the group will not be liable to CT, each company must calculate a ‘shadow’ capital allowance claim in order to determine their amount of tax-exempt profits which determines how much the principal company must distribute to meet the 90% PID requirement.
Minority share holdings - portion of assets disregarded
Where a member of the group is not 100% owned by the principal company or other group members, the deemed sale and reacquisition rules apply to only a portion of the assets of the company (paragraph 9(4) Schedule 17 FA 2006). The portion taken into account is what is left after disregarding the percentage of the assets that are excluded from the financial statements of G (property rental business), as set out in paragraph 31(5) Schedule 17. This is a percentage equal to the beneficial interest in the company held by non-members of the group.
For example, 80% of the ordinary share capital of company S is owned by members of Group REIT G. Before G joins the regime, S owns and rents out one property with market value at the date of entry of 1,000 and base cost for capital gains purposes of 800. S sells the property for 1,500 two years after G joined the regime.
S (pre-entry) is deemed to sell and repurchase 80/100 of the property. The gain at entry of 160 (= 1,000 x 80/100 - 800 x 80/100) is ignored for tax purposes. The gain on the part of the asset that is within the tax-exempt business of S post-entry is tax-exempt. The taxable gain (ignoring indexation) on the part of the asset that is in the residual business of S post-entry is 140 (= 1,500 x 20/100 - 800 x 20/100).
Non-resident group members
Although the modifications set out above apply to UK resident members of the group, the same consequences flow for non-resident group members. To the extent they are needed to compute the Entry Charge, paragraph 11(1)(d) Schedule 17 invokes the necessary parts of section 111 FA 2006. The part about ignoring chargeable gains is not needed, as gains in the hands of a non-resident are exempt under section 2 TCGA. There is no need to deem a new accounting period to begin because this happens anyway under section 9 CTA 2009, as the company so far as it carries on UK property rental business, comes within the charge to CT (paragraph 32(3) Schedule 17 FA 2006) for the first time.
