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Finance Act 2012

Section 21 Schedule 4: Real Estate Investment Trusts

Summary

1.Section 21 and Schedule 4 amend Part 12 (Real Estate Investment Trusts) (REIT) of the Corporation Tax Act 2010 (CTA). The amendments relax the conditions of entry to the REIT regime and the requirements while in the regime.

Details of the Schedule

2.Paragraph 1 introduces amendments to Part 12 of CTA 2010. All references to amendments to legislation are to Part 12 CTA 2010.

3.Paragraph 2 amends section 525 which requires a company or group that gives a  notice to be a REIT to include in the notice a statement that it can meet the REIT regime conditions, including those in section 528 (the company conditions). The amendments change the form of the notice to be given to reflect the changes being made to section 528 as detailed at 4. and 12. below.

4.Paragraph 3 amends section 527 which sets out the conditions for being a REIT in an accounting period. Condition D in section 528, which states that a REIT cannot be a close company, will not apply for the first three years after a company joins the regime.

5.Paragraph 4 amends condition D in section 528, that a REIT cannot be a close company, so that the shareholding of an institutional investor will not, on its own, make a company close for REIT purposes. Paragraph 4 also introduces a new subsection 4A which defines what an institutional investor is for these purposes. In addition new subsection 4B grants a power to make regulations concerning the definition of who is or is not to be regarded as an ‘institutional investor’ for the purposes of this section.

6.Paragraphs 5-6 amend sections 558 and 559, which cover how the demerger of a REIT is dealt with, to accommodate the changes being made to the conditions to be met by a REIT in section 527.

7.Paragraphs 7-8 amend sections 561 and 562 which deal with breaching the REIT conditions in section 528, so that the REIT does not have to give notice that it has not met condition D in section 528 in the first three years after joining the regime as a consequence of the amendment to section 527.

8.Paragraph 9 introduces new section 562A which determines the circumstances when a breach of condition D in section 528 is either to be ignored or to result in the REIT leaving the regime.

9.Paragraphs 10-11 amend section 572 which deals with notices to leave the regime and introduce new section 573A, so that a notice to leave the regime can be issued in certain circumstances where condition D in section 528 is not met. New section 573A also sets out the time at which the REIT will be taken to have ceased being a REIT.

10.Paragraph 12 amends paragraph 577, which deals with multiple breaches of the conditions by which a company or a group qualifies as a REIT, to reflect the changes being introduced to condition D in section 528.

11.Paragraph 13 provides that the changes in paragraphs 2 – 12 will apply to those electing to become REITs with effect from on or after the date of Royal Assent to the Finance Act and for existing REITs for accounting periods beginning on or after Royal Assent to the Finance Act.

12.Paragraphs 14-20 amend section 528(3), the REIT company condition that requires that shares in the company are listed on a recognised stock exchange. The amendment provides that alternatively the condition is met if shares are admitted to trading on a recognised stock exchange. New section 528A is introduced which requires that shares admitted to trading on a recognised stock exchange are listed or traded. This requirement is relaxed in a new REIT’s first three accounting periods by section 528B. The introduction of new sections 562B and C deal with when a breach of new section 528A can be ignored and with the consequence, if the breach is not to be ignored, that the group or company ceases to be a REIT from the end of its second accounting period. Section 573B ensures that a REIT can only benefit from section 528B once.

13.Paragraph 21 provides that the changes in paragraphs 14-20 will apply to all REITs for accounting periods starting on or after the date of Royal Assent to the Finance Act except to the extent, that if they are an existing REIT, they are able to take advantage of the relaxation to section 528A provided by section 528B.

14.Paragraph 22 amends section 530 which requires that 90 per cent of the profits of the property rental business have to be distributed by the date at which the REIT’s tax return is filed. This is referred to as the ‘distribution requirement’. The amendment extends the date by which profits have to be distributed from three months after the filing date to six months after the filing date. This amendment only applies in particular circumstances where a stock dividend has been issued and a market value of the stock dividend has had to be used in accordance with section 530(6C)(b) and this has caused the distribution requirement not to  be met.

15.Paragraph 23 introduces new section 530A which deals with how the distribution requirement (see 14 above) is to be met in situations where profits of the property rental business are increased after the tax return has been submitted. This clarifies under what circumstances additional time is given to meet the distribution requirement and when a charge to tax for not meeting the distribution requirement can be made.

16.Paragraphs 24-26 amend sections 564 and 565, which charge tax on the amount by which the distribution requirement is not met. The amendments clarify when a charge to tax can be made when the distribution requirement is not met and include the circumstances where the time limit is extended under section 530 or new section 530A. The change in paragraph 22 will apply to distributions made on or after the date of Royal Assent to the Finance Act. The changes in paragraphs 23 – 25 will apply to accounting periods starting on or after Royal Assent to the Finance Act.

17.Paragraph 27 amends section 531 ‘conditions as to the balance of business’. This requires that at the beginning of an accounting period, the REITs profits and assets are primarily derived from and involved in its property rental business. Currently condition B in section 531 requires that at least 75 per cent of the assets of the group or company relate to the property rental business. Following amendment the requirement will be that cash and assets involved in the property rental business should be at least 75 per cent of the total assets of the business.

18.Paragraphs 28-32 deal with the consequential changes from paragraph 27 and provide that the changes in paragraphs 27, 28 and 31 will apply to accounting periods beginning on or after Royal Assent and the changes in paragraphs 29 and 30 for REITs joining the regime after Royal Assent.

19.Paragraphs 33-39 abolish the entry charge for companies entering the REIT regime. The abolition applies to those companies that enter the regime on or after the date of Royal Assent to the Finance Act.

20.Paragraphs 40- 42 amend sections 543 and 544 which limit the amount of property financing costs that a REIT can pay in connection with its tax exempt business. For accounting periods starting on or after the date of Royal Assent to the Finance Act, the limit will be based on interest and other payments for borrowing and will exclude the costs of arranging loan finance and other accounting costs will no longer be included. The amendments also limit the amount charged to corporation tax under section 543 (4) to an amount equal to 20 per cent of the property profits.

21.Paragraphs 43-44 amend section 556 which deals with the tax treatment of an asset of the property rental business that is disposed of by way of a trade (i.e. the disposal is taxed). The amendment ensures that section 556 does not apply to disposals made to another member of the REIT. The amendment takes effect where the disposal is on or after the date of Royal Assent to the Finance Act.

Background Note

22.REITs are a tax advantaged vehicle introduced to encourage investment in the property sector. REITs are exempted from corporation tax on the profits and gains arising from their property rental business. REITs have to distribute 90 per cent of the profits of the property rental business to shareholders in whose hands this income is treated as income from property. In this way taxation of income from property is moved from the corporate level to the investor level.

23.The REIT regime was introduced in Finance Act 2006. The legislation was subsequently rewritten to CTA 2010. To date, over 20 REITs have been created with particular focus on commercial property investment.

24.The Government indicated in its response to the 2010 Private Rental Sector consultation that it would look further at the barriers to entry to the REIT regime with the view to facilitating, in the longer term, the establishment of residential REITs. Subsequent further consultation with interested parties suggested that the best way to support the REITs industry in general (and the development of residential REITs in particular) was among other things, to reduce barriers to entry for new REITs and to ensure that the regime does not work so as to inhibit good business practice.

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