IFM22017 - Real Estate Investment Trust: Conditions and Tests: Company Conditions: Institutional Investor carve-out
Source: gov.uk (2025-04-17)


A key principle of the REIT regime is that a REIT should be a widely held entity. The purpose of Condition D is to ensure that this is the case. It is, however, consistent with that principle for a REIT to be controlled by a small number of institutional investors where those institutional investors are themselves “widely held” – i.e. they hold their investments on behalf of a wider group of persons. Such a REIT would still be widely held on a “look through” basis.

Accordingly, the institutional investor carve-out in CTA2010/S528(4C)(a)(ii) enables a company to satisfy the non-close condition for the purposes of Condition D if it is only a close company because it has an institutional investor as a direct or indirect participator. The list of institutional investors is set out at IFM22016 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22016).

The overriding principle when applying the institutional investor carve-out is to consider whether the company only satisfies Condition A or Condition B in CTA2010/S439 (with the modifications explained at IFM22015 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22015)) because of rights and interests held directly or indirectly by institutional investors. This involves two steps:
- First, ascertain whether the company is close on first principles (i.e. applying CTA2010/S439 with the modifications explained at IFM22015 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22015)). If it is not, then Condition D will be satisfied without the need to refer to the institutional investor carve out.
- Second, if the company is close on first principles, ascertain whether that ‘closeness’ can be only established by reference to rights or interests held directly or indirectly by institutional investors. If the answer is yes, then Condition D will be satisfied by virtue of the institutional investor carve out. If the answer is no, Condition D will be failed.
When applying step 1, HMRC acknowledges that in some cases it may be difficult to ascertain whether the company is close on first principles without undertaking a complex analysis which would need to be constantly monitored. In these cases, it would be reasonable for the company to make the prudent assumption it is close on first principles and move onto consider step 2.

Note, however, that different considerations apply when considering whether a REIT is a “disqualified listed company” for the purposes of the substantial shareholdings exemption – see CG53167 (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg53167).

The examples at the bottom of this page illustrate the application of these steps in practice.

Meaning of direct and indirect participator

A direct participator means a person who is a participator for the purposes of CTA2010/S454 (see CTM60107 (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60107)).

Where a partnership is a shareholder in a REIT, the partners in that partnership will be direct participators in the REIT for these purposes. Similarly, where other forms of tax transparent vehicle hold shares in a REIT (for example, a contractual scheme such as a Luxembourg Fonds Commun du Placement), the underlying investors will be direct participators where their participation in the tax transparent vehicle results in them having a share or interest in the income of the REIT.

An indirect participator means a person who has a share or interest in the capital or income of the company through one or more tiers of bodies corporate (CTA2010/S528(5B)(b)). CTA2010/S528(5C)(a) provides that this is to be read in accordance with TCGA92/SCH5AAA/PARA46(9) and (10). This in turn engages PARA46(12), with the effect that a “body corporate” includes any offshore collective investment vehicle deemed to be a company by TCGA92/SCH5AAA/PARA4 (see CG73996A (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg73996a)) and any other entity deemed to be a company by any provision of TCGA92.

No requirement to look behind institutional investors

Where an institutional investor is a direct or indirect participator in a REIT, there is no need to “look behind” that institutional investor for the purposes of the institutional investor carve-out. The analysis effectively stops at the level of the institutional investor.

For example, if a collective investment scheme limited partnership (CIS LP) which meets the GDO condition or non-close condition (and so is an institutional investor: see IFM22016 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22016)) owns 100% of the shares in a company, the institutional investor carve out will apply to that company (assuming it is close on first principles), regardless of the status of the limited partners in the CIS LP.

Intermediate holding entities

An institutional investor may hold its interest in a REIT through one or more intermediate holding entities. Those intermediate holding entities, which could be companies or transparent entities such as a limited partnership or unit trust, may not themselves be institutional investors and therefore could, if viewed in isolation, cause the non-close condition to be failed.

It is, however, clear from the reference to “indirect participator” in CTA2010/S528(4C)(a)(ii) that the institutional investor carve-out will still apply if an institutional investor holds its interest indirectly through one or more tiers of intermediate holding entities. It would frustrate the purpose of the legislation if the rights and interests of any intermediate holding entities were to be artificially separated from the rights and interests of its indirect participators (including any institutional investors who are indirect participators).

It follows that when applying the institutional investor carve out, any intermediate holding entities should be “looked through”, with the rights and interests of the intermediate holding companies treated as if they were the rights and interests of its ultimate shareholders. This is illustrated in Examples 5, 6 and 7 below.

This approach should be followed regardless of how many intermediate holding entities there are between the REIT and the institutional investor(s) and regardless of whether those intermediate holding entities are companies or transparent entities (or a combination of both).

Examples

The following examples illustrate the application of the institutional investor carve out in practice.

Example 1

80% of the shares in Company A are directly held by Investor Z, which is an institutional investor. The remaining 20% of the shares are held by Investor Y, which is not an institutional investor. Investor Y does not exercise any control over Company A.

Company A will satisfy Condition D because it is close only because of the interest held by Investor Z. Closeness cannot be established by reference to Investor Y alone.

Example 2

80% of the shares in Company A are directly held by Investor Z, which is a CIS LP which does not meet the requirements to be treated as an institutional investor. Investor Z has two limited partners, LP1 and LP2. LP1 and LP2 are each institutional investors and are entitled to 50% of the profits of Investor Z.

The remaining 20% of the shares in Company A are held by Investor Y, which is not an institutional investor. Investor Y does not exercise any control over Company A.

The first step, applying CTA2010/S528(5D)(b)(ii), is to ignore the voting rights exercised by the general partner of Investor Z. These voting rights are also not attributed to any other partner.

As Investor Z is not an institutional investor, look through to partners LP1 and LP2. As Investor Z is a partnership, LP1 and LP2 will be direct participators in Company A for the purpose of this condition. As LP1 and LP2 are both institutional investors, Company A will satisfy Condition D because it is close only because of the interests held by LP1 and LP2. Closeness cannot be established by reference to Investor Y alone.

Example 3

The facts are as Example 2, save that LP2 is not an institutional investor nor are any of the partners in LP2 themselves institutional investors.

Company A therefore does not satisfy Condition D because together the partners in LP2 and Investor Y hold over 50% of the interests in Company A, making it close. In other words, closeness can be established without reference to the interests held by the institutional investor (LP1).

Example 4

80% of the shares in Company A are directly held by Investor Z, which is a limited partnership collective investment scheme (CIS LP) which satisfies the GDO condition and therefore qualifies as an institutional investor. The remaining 20% of the shares in Company A are held by Investor Y, which is not an institutional investor. Investor Y does not exercise any control over Company A.

Investor Z has a cornerstone investor (Investor C) which holds over 50% of the economic rights. As Investor Z is a limited partnership, Investor C, as a partner in Z, is a direct participator in Company A. Consequently, Company A would be treated as a close company on first principles.

However, Investor Z is an institutional investor. Therefore, when applying the institutional investor carve out there is no need to “look through” to the interests held by the limited partners in Investor Z. Accordingly, as in Example 1, Company A will satisfy Condition D because it is close only because of the interest held by Investor Z. Closeness cannot be established by reference to Investor Y alone.

Example 5

80% of the shares in Company A are directly held by Holdco Z, which is a company which is wholly owned by Shareholder A. Shareholder A is an institutional investor.

The remaining 20% of the shares in Company A are held by Investor Y, which is not an institutional investor. Investor Y does not exercise any control over Company A.

In applying the institutional investor carve-out, it is necessary to establish whether Company A is close without reference to either Shareholder A itself (as an indirect participator) and Holdco Z (as a direct participator). This is because Shareholder A is an institutional investor and, for the reasons explained above, Holdco Z is “looked through” such that the rights and interests of Holdco Z are treated as if they were the rights and interests of Shareholder A.

Company A will therefore satisfy Condition D because closeness cannot be established by reference to Investor Y alone.

Example 6

80% of the shares in Company A are directly held by Holdco Z, which is a company with two equal shareholders – Shareholder A and Shareholder B, both of which are institutional investors.

The remaining 20% of the shares in Company A are held by Investor Y, which is not an institutional investor. Investor Y does not exercise any control over Company A.

As with Example 5, it is necessary to establish whether Company A is close without reference to Holdco Z, Shareholder A and Shareholder B. Accordingly, Company A will therefore satisfy Condition D because closeness cannot be established by reference to Investor Y alone.

Example 7

The facts are as Example 6, save that Shareholder B is not an institutional investor. For the reasons explained above, Holdco Z is “looked through” to identify the indirect participator (CTA2010/s528(5B)) such that the rights and interests of Holdco Z are treated as if they were the rights and interests of Shareholder A and Shareholder B (this would be in proportion to their respective shareholdings in Holdco Z, on the assumption that all the shares in Holdco Z carry the same rights).

It follows that in applying the institutional investor carve-out, it is necessary to consider whether Company A is close without reference to either Shareholder A or 50% of the rights and interests held by Holdco Z.

Company A will therefore not satisfy Condition D because closeness can be established solely by reference to Shareholder B (looking through Holdco Z) and Investor Y, which together hold 60% of the interests in Company A.

Example 8

Company B is structured as a deadlocked joint venture company with two shareholders: (i) Investor A, which is a collective investment scheme limited partnership which satisfies the non-close condition and is therefore an institutional investor, and (ii) Investor B, a non-institutional investor. Each has a 50% interest in Company B and cannot control company B on its own.

Company B will satisfy Condition D because it is close only because of the interest held by Investor A. Investor B does not control Company B and therefore closeness cannot be established by reference to Investor B alone.