GREIT05015 - Capital gains: computational rules: movement of assets out of the ring fence

When an asset that has been used in the tax-exempt business changes use to non tax-exempt business, there is a deemed sale by the tax-exempt business (C (tax-exempt)) and reacquisition by the non tax-exempt business, C (residual) (section 125(2) FA 2006). Any gain or loss crystallised by the deemed sale accrues to C (tax-exempt), and is therefore exempt from tax.

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.

Movement out of ring fence as a result of a disposal by way of trade

If the asset is transferred out of the tax-exempt business because it is being sold by way of trade then, for the purposes of TCGA, the asset is treated as though it had never been within the ring fence (section 125(5) FA 2006) – see GREIT04515.

Movement out of ring fence as a result of the 3 year development rule

If a ring fence property has been developed and is sold within three years of completion, similar rules apply to treat the gain on the property as if it had never been within the ring fence (section 125(5) FA 2006) – see GREIT04520.

Movement of part of an asset

If part of an asset that is used wholly and exclusively for the purposes of the tax-exempt business is transferred out of 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.

For this reason, there will be an immediate adjustment even if a distinct part of the overall asset is already used for non-exempt activities. A calculation is required as follows:

1. Obtain the market value of the part of the asset transferred at the time of transfer.
   
   
2. Calculate the gain on that part asset. (If the asset has a single base cost the appropriate proportion to use in this calculation can be obtained by following the principles at section 42 TCGA.) Although the gain is exempt from tax, it still has to be computed because the amount will feature at some stage in the attribution of distributions to tax-exempt and taxable activities (see GREIT08010).
   
   
3. The market value obtained at step one will be the base cost for TCGA purposes of that part going forward for C (residual).

Single (undivided) asset in mixed use

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).