The Real Estate Investment Trusts (Financial Statements of Group Real Estate Investment Trusts) Regulations 2006

Prospective

EXPLANATORY NOTE

(This note is not part of the Regulations)

Part 4 of the Finance Act 2006 (c. 25) (“Part 4” of “the Act”) contains provisions relating to Real Estate Investment Trusts (“UK-REITs”). A UK-REIT is a company which carries on property rental business, and satisfies various requirements set out in the Act: the profits of a property rental business carried on by a UK-REIT are not charged to corporation tax. The Act also contains similar provisions relating to groups of companies (“Group REITs”). Many of those provisions are in Schedule 17 to the Act, which modifies Part 4 in its application to groups.

These Regulations exercise the powers conferred by paragraph 31(7) of Schedule 17 to make further provision relating to the contents of the financial statements of Group REITs.

Regulations 1 to 3 are of a preliminary nature. Regulation 1 provides for citation, commencement and effect; and regulation 2 for interpretation. Regulation 3 provides that a member of a group has significant influence over another entity if the group member holds more than 20% of the beneficial interest in that other entity, and that percentages of beneficial interest in an entity are to be determined by reference to profits available for distribution to equity holders.

Regulation 4 deals with the general scope of these Regulations. For each of its accounting periods, the principal company in the group must prepare a financial statement for the group in so far as it carries on property rental business while Part 4 applies to it (a financial statement for “G (property rental business)”) and a financial statement for the group in so far as it carries on other business while Part 4 applies to it (a financial statement for “G (residual)”). The principal company must also prepare a financial statement for G (property rental business) in respect of its UK business.

Regulations 5 to 11 then make further provision relating to the contents of the financial statement for G (property rental business) for an accounting period and to the contents of the financial statement for G (residual business) for that accounting period. Regulation 5 deals with general matters relating to the contents of these statements. Regulation 6 contains provisions for determining the amount of financing costs (external) to be shown in the financial statement for G (property rental business). Regulation 7 deals with the treatment of items which arise from events or transactions that are outside the ordinary transactions of the group, and which are not expected to recur regularly and frequently. Regulation 8 applies if a member of the group holds a percentage of the beneficial interest in another entity which is not a member of the group. The group member must account for income received on the basis that the beneficial interest is held as an investment, and must show that beneficial interest as an asset of the group member. But these rules are subject to further provisions: a joint venture company in which a group member is a joint venturer (and where the requisite notice has been given) (see regulation 9), an open-ended investment company over which the group member has significant influence (see regulation 10) and a non-corporate entity over which a group member has significant influence (see regulation 11) are all treated, for accounting purposes, as a member of the group.

Regulation 12 makes further provision relating to the content of the financial statement for G (property rental business) in respect of its UK business.

Regulation 13 makes further provision, and deals with the time by which the financial statements must be supplied.

A regulatory impact assessment for the introduction of the UK-REIT regime was published in March 2006 and may be found at www.hmrc.gov.uk/ria.