»Ê¹ÚÌåÓýapp

»Ê¹ÚÌåÓýapp examples here and at IFM25055 illustrate how TCGA1992/S171, S171A, S135 and S179 operate where a Group REIT is involved. Indexation is ignored. 

Facts for examples

A Group REIT consists of principal company P and two subsidiaries, A and B.  P carries on most of the group’s property rental business together with some other activities, referred to here as the property rental business and residual business of P, respectively. 

P had acquired property X on 1 January 2013 for 800.  P transferred property X to the newly incorporated company A on 1 May 2014. At this time the market value of property X was 1,100 and that is the amount P subscribed for the share capital of A. »Ê¹ÚÌåÓýapp market value of property X on 1 January 2016 (the date the group joins the regime) was 1,300.  A has no other activity apart from renting out property X. 

B carries on only residual activities. 

»Ê¹ÚÌåÓýapp deemed groups (CTA2010/S536(2)) are

• »Ê¹ÚÌåÓýapp group so far as it carries on a property rental business, a group consisting of the  property rental business of P and the property rental business of A (B has no property rental business activities),
• »Ê¹ÚÌåÓýapp pre-entry group, a group consisting of P, A and B (up to the date the group joined the regime), and
• »Ê¹ÚÌåÓýapp group so far as it carries on residual business, a group consisting of the residual business of P and B (since A has no residual business and B has no property rental business).   

For the purposes of TCGA1992/S171 and S171A it is only necessary to make a distinction between two groups

• the group in so far as it carries on property rental business, and
• the group in so far as it carries on residual business

Situation 1

On 1 May 2016, P started to occupy X as the headquarters of the group, when the market value of X is 1,500.  P pays rent to A, as owner of X. »Ê¹ÚÌåÓýapp asset ceases to be part of the property rental business of A and transfers to the residual business of A.  »Ê¹ÚÌåÓýapp group in so far as it carries on residual business now consists of the residual business of P, the residual business of A and B. Put simply, all the property rental business is now conducted by P. 

Although A’s ownership of property X has not changed, there is a disposal for tax purposes. Property X has left the property rental business to join the residual business which is a separate group for the purposes of TCGA1992/S171 and therefore an adjustment is necessary.

»Ê¹ÚÌåÓýapp immediate effect is that A’s property rental business has disposed of property X to A’s residual business at a market value of 1,500. While the  disposal   of property X by A is in the course of  A’s property rental business  and does not create a chargeable gain, there will be a rebasing of A’s interest in property X for the purposes of its residual  business which will be the market value of X at the date of transfer (ie 1,500).

In the future, if the shares of A  are sold no degrouping charge will arise since A,  in so far as it carries on residual business, is treated as a separate company, in a separate group,  from A in so far as it carries on property rental business for the purposes of corporation tax (CTA2010/S541). As such, A, in so far as it carries on its residual business, has not acquired an asset under TCGA1992/S171.

Two more situations based on the same facts are considered in IFM25055.