IFM22072 | Real Estate Investment Trust : conditions and tests: balance of business conditions: outside the ordinary course of business. (CTA2010/S531(4)(c))

The property rental profits requirement in Condition A and the assets requirement in Condition B were each set at 75% to provide sufficient margin to allow for other activities to take place without affecting the tax-exempt status of the REIT. However, to prevent distortion of the result, in applying the test CTA2010/S531(4)(c) excludes from the Condition A profits requirement, and CTA2010/531(7A)(a) excludes from the Condition B assets requirement, items that are outside the ordinary course of the REIT’s business (irrespective of the treatment in the accounts), having regard to the group or company’s past transactions.

It is a question of fact, depending on the business of the company or, in relation to a group REIT, the group, as to what is within its ordinary course. Where there is a history of an activity it will be less likely that similar activity can then be viewed as outside the ordinary course of that business. Factors to be considered include the scale and nature of the activities. Where a business undertakes property development for sale similar in scale to previous development, it may be sufficiently different in nature as to be outside the ordinary course of business. Likewise, activity similar in nature may be sufficiently different in scale to be outside the ordinary course of business.

Examples

1. A single trading transaction by a property group/company selling property, developed for sale, with no, or a limited, history of such activity will be outside the ordinary course of business. A limited history may involve infrequent transactions (e.g. no transactions occurring in the previous 3 years, although the acceptable length of time between transactions will depend on the nature of the transactions) or transactions of low or insignificant scale compared to the current one (e.g. less than 10%).

2. A property development which is significantly different in nature to previous developments is outside the ordinary course of business. The value of the development or nature of services supplied with completed property is not determinative of the nature of the development. Developments of residential accommodation are viewed as different in nature to developments of commercial property.

3. The disposal by a property group/company of a headquarters building will generally be outside its ordinary course of business.

4. A property group/company regularly undertakes property development for resale, alongside development of property for rental. The property development for resale will be within the ordinary course of the entity’s business and the profits fall within the residual business.