IFM22012 | Real Estate Investment Trust: conditions and tests: Company Condition C: ownership by institutional investors: S528ZA

CTA2010/S528ZA expands on Condition C in CTA2010/S528(3)(b), which enables Condition C to be satisfied by a company/principal company where “at least 70% of the shares forming the company’s ordinary share capital are owned by one or more institutional investors.”

A list of institutional investors can be found at CTA2010/S528(4A). (see IFM22016)

For the purposes of CTA2010/S528(3)(b), a person “owns” ordinary share capital if the person owns it (a) directly, (b) indirectly, or (c) partly directly and partly indirectly. (CTA2010/S528ZA(2)).

When determining indirect ownership for this purpose the rules at CTA2010/S1155 to S1157 apply. These rules cover what is meant by indirect, partly indirect and partly direct ownership and how this is calculated for the purpose of CTA2010/S528ZA(2).

The concept of indirect ownership enables a company/principal company to trace through certain intermediate entities to identify its ultimate owners. Further information on calculating the level of indirect ownership can be found at CTM80151.

The rules in CTA2010/S1155to S1157 refer to bodies corporate. However, when applying CTA2010/S1155to S1157 to identify indirect ownership of shares in a REIT, certain other entities will also be treated as bodies corporate, and can therefore be taken into account in the calculation of indirect ownership. These are:

• a) An exempt unauthorised unit trust (as defined in the Unauthorised Unit Trusts (Tax) Regulations 2013 (S.I. 2013/2819). See IFM10220+

• b) Any entity which is treated as a body corporate by TCGA92/SCH5AAA/PARA46 (UK property rich collective investment vehicles etc) (see sub-paragraph (12) of that paragraph), see CG73995p+, and,

• c) An authorised contractual scheme which is a co-ownership scheme, (as defined in s237(3) and 235A, respectively, of the Financial Services and Markets Act 2000). See IFM08110+

In relation to an entity within paragraph (a), (b) or (c), references to ordinary share capital are to be treated as references to units or other corresponding interests in the entity concerned.

CTA2010/S528ZA(5) covers scenarios where a person is treated as continuing to hold shares in a company where there are repurchase or stock lending agreements. This follows the rules in TCGA92/SCH7AC/PARA12 and 13. See CG53082.

Partnerships

The purpose of looking at the ownership of shares held by a partnership is to identify the extent of ownership of a REIT by institutional investors. When determining the ownership of ordinary share capital for the purpose of CTA2010/S528(3)(b), the general rule is that partnerships are transparent. As a result, where a company’s ordinary share capital is held by a partnership, CTA2010/S528ZA(6) treats each partner in the partnership as if it directly owned a proportion of the ordinary share capital equal to that partners proportionate interest in the assets of the partnership.

There is an exception to the general rule where the partnership is a limited partnership which is a collective investment scheme (a CIS LP) that would be an institutional investor as a result of CTA2010/S528(4A)(c). In this case it is not necessary to look through to the partners. This is set out in CTA2010/S528ZA(7) which disapplies the general rule in subsection (6) while the partnership qualifies as an institutional investor (and where relevant the GDO condition in CTA2010/S528ZB is met).

This applies from 22 February 2024 onwards when the requirement for a limited partnership which is a collective investment scheme to meet the genuine diversity of ownership (GDO) condition in order to be an institutional investor within CTA2010/S528(4A)(c) was introduced. Prior to this, and for accounting periods beginning on or after 1 April 2022, the exception to the rule in CTA2010/S528ZA(7) applied only to a limited partnership which was a collective investment scheme and which also met a separate GDO condition set out in CTA2010/S528ZB. In these circumstances, the limited partnership itself would be treated as if it were an institutional investor for the purposes of this rule, see CTA2010/S528ZB(1).

Genuine Diversity of Ownership (GDO) condition CTA2010/S528ZB

CTA2010/S528ZB sets out the requirements to meet the GDO condition which are in practice a modified version of the GDO condition used in the Offshore Funds (Tax) Regulations 2009. This modified version which applies for the purposes of the REIT rules is similar to the GDO condition used for the purposes of non-resident capital gains in TCGA92/SCH5AAA. The guidance at IFM17000+ is therefore equally applicable to a CIS LP for the purposes of CTA2010/S528ZB.

The GDO condition was relevant to the application of CTA2010/S528ZA(7) for partnerships that are a collective investment scheme for accounting periods that began on or after 1 April 2022. Following amendments effective from 22 February 2024, the GDO condition now applies when determining whether certain investors are institutional investors within CTA2010/S528(4A) (see IFM22016).

Whether or not a particular investor satisfies the GDO condition is a question of fact and it is not something which HMRC can confirm under the Non-Statutory Clearance Service. The Non-Statutory Clearance Service remains available for genuine points of uncertainty which are not addressed in the manual.