IFM24010 - Real Estate Investment Trust : Property rental income: capital allowances: general: CTA2010/S537, CTA2010/S580 and CTA2010/S599(8)
Source: gov.uk (2025-04-17)


The tax-exempt profits of the property rental business are based on the computation of profits for the purposes of taxing a property business. One element in arriving at the profit for these purposes is capital allowances. The normal rules for companies that are not subject to a REIT election are that a company may make a claim for capital allowances it wants to deduct in the period (CAA2001/S3(1)).

The CAA2001/S3(1) requirement to claim capital allowances and the choice of how much to claim are set aside in calculating the income of the tax-exempt property rental business (CTA2010/S599(8)). Instead, the maximum capital allowances, including structures and building allowances (SBAs) available under CAA2001 must be taken into account in the calculation of the profits of the property rental business. This will have the effect of reducing profits and the property income distribution to, and the tax liability of, the shareholders.

This means that a capital allowances 'shadow' regime operates within the property rental business, although the obligation to take into account the maximum capital allowances does not extend to first year allowances or the annual investment allowance, where there is flexibility about the amounts taken into account (see below).

In practice, a REIT is therefore obliged to identify the amount of qualifying expenditure it has incurred in each accounting period and include the maximum capital allowances available (after any claims for first year allowances or the annual investment allowance it may choose to make are taken into account) in the calculation of tax-exempt profits. The same principles apply to Company REITs and members of Group REITs.

Apart from some modifications when the company joins or leaves the regime, and when assets move between the property rental and residual businesses (see IFM24015 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm24015)), all the other capital allowance rules apply as normal to the property rental business. For more information see the Capital Allowances Manual (https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca).

Opening and closing book values

When a company joins the regime, the property rental business takes over the capital allowance position of the company’s property rental business as at the end of the accounting period before it joined, as set out in CTA2010/S537. This is on a ‘stand-in-shoes’ basis, at values that result in no balancing charge or allowance arising to the company, and provides the opening values for property rental business assets on which ‘shadow’ capital allowances must be calculated.

This specification of the transfer values in CTA2010/S537 means that CAA2001/S198 and S199 elections cannot be made on entry to the regime. As the values are already set by CTA2010/S537 there is no need for such elections.

Similarly, when a company leaves the regime CTA2010/S580 applies and there is a deemed sale and reacquisition such that no balancing charges or allowances arise. Again, no elections can be made under CAA2001/S198 and S199 on exit from the regime.

Dual purpose assets

If plant or machinery is used partly for the purposes of the property rental business and partly for other activities, the qualifying expenditure should be apportioned between the two on a just and reasonable basis. This follows partly from the concept within the UK-REIT regime of references to assets being also references to part of an asset (CTA2010/S608(1)) and partly from CTA2010/S599(7), which apportions dual-purpose expenditure on a just and reasonable basis. CTA2010/S599(8) only applies to the expenditure apportioned to the property rental business.

Other activities of the company

There are no special capital allowances rules that apply to the residual part of the company. When the company joins or exits the regime, there is no deemed sale and reacquisition of residual business assets.

First Year Allowances and Annual Investment Allowance

A REIT company can claim first year allowances (FYAs such as the super-deduction or full expensing) or the annual investment allowance (AIA).

Unlike the mandatory inclusion of capital allowances noted above, the usual rules for FYA or AIA claims apply. The REIT should make a claim for the FYAs or AIA and this may be a full or partial claim (see CA23110 for FYAs and CA23085 for AIA). Where FYAs or AIA are only claimed on part of the qualifying expenditure, the remaining expenditure must be pooled and will be subject to the rule that the maximum capital allowances available must be taken into account in each accounting period.

Land Remediation Relief

A REIT company is able to claim Land Remediation relief and Land Remediation tax credit. See the Corporate Intangibles and Research & Development manual CIRD60000 (https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird60000) onwards for the conditions to be met for the relief and credit.

Group REITs

These rules apply to each member of a Group REIT to the extent that it carries on a qualifying property rental business.