IFM22330 | Real Estate Investment Trust : Group conditions and rules: Financial Statements: property rental business and residual business: entities treated as opaque

The activities of entities other than group members are reflected in the financial statements for the property rental business and residual business in one of two ways, depending on nature of the vehicle and the level of influence members of the group have over it. One way broadly treats the entity as opaque: the other treats the entity as transparent. (see IFM22335).

For entities that are treated as opaque, the value of the member’s interest in the entity is shown as an asset of the residual business and payments made by the entity are shown as income of the residual business of the member. It does not therefore matter what activities are undertaken or what kind of assets are owned by the entity.

This treatment applies to the following entities:

• any entity in which members of the group do not have ‘significant influence’ (broadly, owning 20% or less of the entity – see IFM22345);

• companies other than

  • members of the group, as defined in CTA2010/S606 (i.e. they are not 75%/ effective 51% subsidiaries of the principal company of a Group REIT);

  • joint venture companies in respect of which a Joint Venture Look-Through election is in place (see IFM30005); and

• open-ended investment companies (OEICs).

This means that some entities that are treated as transparent for tax purposes will be treated as opaque in the preparation of the financial statements of the property rental business and the residual business. However, this treatment of the income arising and of assets held by the entity for the Balance of Business Conditions does not extend to calculation of tax-exempt profits.

Example

A member of a Group REIT has a 10% interest in a partnership that owns a property valued at 1000 and generating a rental profit of 60. The partnership also has cash on deposit of 400 which yields income in the amount of 20. As this entity is treated as opaque, the interest in the partnership is all shown in the financial statement of the residual business as:

Asset of 100 (10% of 1000) + 40 (10% of 400) = 140

Income of 6 (10% of 60) + 2 (10% of 20) = 8

However, this treatment for financial statement purposes does not change the analysis for tax purposes and the group member with interest in the partnership will have tax exempt property rental income of 6 and residual taxable income of 2 from the partnership.

The table at IFM22340 summarises the treatment of various types of vehicles.