IFM22360 | Real Estate Investment Trust : Group conditions and rules: Financial Statements: UK property rental business

The financial statements for the UK property rental business are used in determining whether the financing-cost ratio test in CTA2010/S543 is met. This statement provides the profit figure for the calculation at s543(2). It is also used to determine the minimum level of distribution required to meet 90% distribution condition in CTA2010/S530(1)(b), and in applying the attribution rules in CTA2010/S550, to determine the amount of distributions that must be paid under deduction of basic rate income tax.

This financial statement shows the aggregate of the profits of the UK property rental business of each member of the group. Unlike the financial statements for the property rental business and residual business, it does not exclude intra-group transactions.

Measurement

The financial statement for the UK property rental business is drawn up using tax-based calculations of profits, as set out in CTA2010/S599. They will therefore include the taxable profits of group members as submitted to HMRC on CTSA returns and include relief for losses brought forward from earlier accounting periods and losses group relieved. If enquiries into those returns (or corrections made within 12 months of the filing date) alter the aggregate tax-exempt business income, the principal company may need to declare additional PID to meet the 90% distribution requirement. Only if the increased profits make a material difference to the figures will it be necessary to submit amended financial statements for UK Property rental business to reflect the changes.

Subsidiaries that are not wholly owned

Where the group’s interest in a subsidiary is less than 100%, the financial statements exclude a proportion of the profits etc represented by the beneficial interest in the company held by non-members of the group (CTA2010/S533(3) and (4)). For this purpose, the beneficial interest in the subsidiary is measured by reference to the beneficial entitlement to profits available for distribution to equity holders.

Intra-group transactions, balances etc

In drawing up the financial statement for the UK Property rental business, intra-group transactions are not ignored. For example, Group REIT member G1 lends money to Group REIT member G2. To the extent the loan relates to property rental business of G2, the interest is allowed as a deduction in arriving at the UK property rental profits of G2, and is included in the taxable (residual) part of G1.

Expenses - amounts to be shown separately

As part of the process for deciding if the interest cover test is met, the financial statement for UK property rental business has to show separately capital allowances and financing costs (SI 2006/2865 Reg 12(3)). ‘Financing costs’ are defined in CTA2010/544(4) and include finance leasing costs as well as interest – see IFM22200 for more detail. For an example of how they are calculated, see IFM22350.