IFM26040 - Real Estate Investment Trust : Leaving the regime: early exit: company notice within ten years of joining: CTA2010/S581 - HMRC internal manual (2024)
Where a company or principal company of a group REIT leaves the regime voluntarily by giving notice under CTA2010/S571 and was in the regime for less than ten years, a special rule applies to the disposal of property rental business assets’ that take place within the ‘post-cessation period’ (CTA2010/S581).
The rule is that tax payable on the disposal will be determined without taking account of any deemed disposals on entry to or exit from the regime, or on movements out of the property rental business.
The asset will therefore not benefit from rebasing to market value at entry to the regime, and the computation of any profits or gain on disposal will use the original cost of the asset to the company. Neither is there to be a refund of any Entry Charge paid (see IFM23025) and attributable to that property.
For this purpose, a ‘property rental business asset’ is one that was exploited to produce rental income for the property rental business. The ‘post cessation period’ is the two years following the date of exit from the regime.
Group REITs
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
Joint Ventures
The rules for disposals of property rental business assets following early exit apply equally to joint venture companies (CTA2010/S589). The date specified in the election under CTA2010/S586 (for joint venture companies) or S587 (for joint venture groups) is the date of entry into the REIT regime for the purpose of determining whether there is an early exit. When a Joint venture notice under CTA2010/S586 or S587 ceases to apply the provisions of CTA2010/Part 12 cease to apply to the Joint Venture Company or group. However the early exit provisions continue to apply (CTA2010/S590(6))
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
10 percent of the outstanding vote or value of the securities of any one issuer may be held (again, a taxable REIT subsidiary is an exception to this requirement) 25 percent of the total assets can be securities.
(iii) With respect to property that consists of land or improvements, the REIT has held the property for not less than two years for the production of rental income.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Publicly-traded REITs offer the advantage of liquidity, since individual investors can sell their shares at any time. Privately-traded REITs don't offer this liquidity, but may offer higher dividends. REIT shares are eligible for a step-up in basis upon death, just like real property investments.
30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.
Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.
If the REIT held the property for more than one year, long-term capital gains rates apply; investors in the 10% or 15% tax brackets pay no long-term capital gains taxes, while those in all but the highest income bracket will pay 15%.
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to. However, if an investor buys a non-traded or private REIT, the investment should be considered illiquid.
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