IFM29020 | Real Estate Investment Trust : Miscellaneous: indirect ownership of property: Exemption from tax

Whether income and gains from indirectly held property are tax exempt depends on the legal nature of the entity through which it is held. For treatment of profits and asset values for the balance of business conditions, see IFM29015. For the application of the property rental business conditions (including the 90% distribution requirement), see IFM29025.

Nature of the entity

For deciding if the profits (income and gains) of a property rental business are tax exempt the legal nature of the vehicle generally decides the question. The exceptions are for joint venture companies where there is a Joint Venture Look-Through notice in place and, for group UK-REITs, companies that are members of the REIT group (see IFM29010).

Transparent treatment

The principle of relying on the nature of the entity means that qualifying UK property and overseas property income derived from an interest in a tax-transparent entity, such as a partnership, is tax exempt (to the extent of the UK-REIT company or UK-REIT group’s interest in the entity).

These consequences apply to all entities in which members of a Group UK-REIT have an interest (apart from members of the REIT group – see IFM29015). For company UK-REITs, they apply to transparent entities in which the company itself has an interest.

If a company UK-REIT has a subsidiary, the income, assets etc. of a transparent entity in which the subsidiary has an interest are apportioned to the subsidiary in the normal way and UK property/ overseas property income is taxable, as are any gains on disposal of the entity’s property.

Opaque treatment

If the entity is opaque for tax purposes, for example a company that is not a member of the REIT group, the property income of the entity is taxable. Any gains on disposal of the entity’s property are chargeable gains. The opaque treatment does not apply to group UK-REITs for companies that are members of the REIT group. A ‘look-through’ treatment applies to these companies to the extent of the UK-REIT group’s interest in the entities (see IFM29015).