IFM22070 - Real Estate Investment Trust : Conditions and Tests: Balance of business Conditions: Condition A (CTA2010/S531(1)-(4B))
Source: gov.uk (2025-04-17)


Condition A provides that at least 75% of the ‘aggregate profits’ of the company (group in the case of a Group REIT) in an accounting period must be derived from its property rental business (CTA2010/S531(1)). For the definition of ‘property rental business’ see IFM21020 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm21020) and note that for group REITs this is not restricted to the property rental profits that are exempt from tax as a result of the application of the UK-REIT legislation. The balance of business condition A relates to the ratio of property rental business to other business carried on world-wide by the group.

Condition A must be met for each accounting period, subject to relaxation for minor breaches (IFM27005 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm27005)).

Where in the case of a group REIT individual financial statements for each member of the group are not required as a result of CTA2010/S533(1B) and (1C), it is assumed that the group meets Condition A (CTA2010/S533(IE)) (IFM22303 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22303)).

Measure of “aggregate profits”

The 'aggregate profits' are the sum of the profits of the property rental business and the residual business of the group or company.

For a group REIT this is the aggregate of profits shown in the financial statements for each business under CTA2010/ 532(2)(a) and 532(2)(c) for the relevant accounting period. (See IFM22300 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22300))

The test is by reference to profits only. This means that where the result for the group’s property rental business as shown in the financial statement under S532(2)(a) is a loss this will be nil for the purpose of condition A. Where the result is nil for the property rental business then the balance of business condition A cannot be met, unless aggregate profits are also nil.

The same principle applies to calculating the aggregate profits, so, for example, where there was a loss for the property rental business of 10 and a loss for the residual business of 5, both would be treated as nil, resulting in aggregate profits of nil. Likewise, if there was a loss in the property rental business of 10 and a profit in the residual business of 5, the aggregate profits would be 5, being the sum of property rental business nil plus residual business 5.

The reference to ‘profits’ means that changes in fair value (for example a derivative contract relating to an asset of the property rental business) that are taken to equity rather than P&L are excluded.

The measure of 'profits' for this condition is as provided for under international accounting standards (IAS), before the deduction of tax and excluding under CTA2010/S531(4):
- realised and unrealised gains or losses on the disposal of property,
- changes in the fair value of hedging derivative contracts (as defined in CTA2010/S599(4)),
- items which are outside the ordinary course of the company’s or group’s business (irrespective of treatment in the accounts), having regard to the company or group’s past transactions both before and following election into the REIT regime (see IFM22072 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22072)), and
- for accounting periods that begin on or after 1 April 2022, profits of the residual business of the company or group resulting from compliance with planning obligations entered into in accordance with section 106 of the Town and Country Planning Act 1990 in the course of the property rental business of the company or group (see IFM22073 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22073)).
The exclusion of realised and unrealised gains on property means that property disposals that are not transactions taxed as trading transactions in the residual business are excluded. This therefore covers realised and unrealised gains and losses relating to:
- disposal of the property rental business assets,
- disposals transferred to the residual business under CTA2010/S556(2) (the 3-year development rule) and falling to be treated as a non-trading transaction,
- investment property that is not part of the property rental business, e.g. ‘owner occupied’ property,
- fair value accounting gains/losses included in the measure of profits under IAS.
The majority of fair value changes in interest rate swaps are taken to P&L and but for CTA2010/S531(4)(b) they would be included in the IAS measure of income profits so they are also excluded from the measure of profits.

SI2006/2865 Regulation 5(2) confirms that the value of holdings of one member of the group in another member of the group is excluded from the financial statements. It follows from this that gains/losses on the disposal of shares in a group company are excluded from the balance of business test. Thus capital gains on disposal of property, directly or indirectly by a disposal of shares in another member of the group, are excluded from the measure.

As the “aggregate profits” comprises profits on a group-consolidated basis, intra-group transactions are generally ignored. However, a part of the intra-group transactions are not to be ignored if non-group members own shares in subsidiaries. The amount that is not ignored is the percentage represented by the beneficial interest in the subsidiary that is owned by non-group members. Beneficial entitlement is measured by reference to the beneficial entitlement to profits available for distribution to shareholders.

Note that this accountancy-based measure of profits of the property rental business for this test is unlikely to be the same as the measure of profits used for the 90% Distribution requirement (which is a measure of profits for tax purposes).

Measure of profits of the property rental business

The group REIT’s accounting period profits of the property rental business for the purposes of the balance of business condition A are not provided by the financial statement under CTA2010/S532(2)(a). Only the “aggregate profits” are defined by reference to the financial statements.

The financial statements of the property rental and residual businesses for the group (CTA2010/S532(2)(a) and (c)) exclude intra-group transactions (SI 2006/2865/Regulation 5(2)). However intra-group reallocations may be required to arrive at the profits that refer to the property rental or residual businesses. There may be costs, referable to the property rental or residual business that have not been recharged and may therefore require adjustment to arrive at the accounting period profits of the property rental business for the purposes of the balance of business condition A.

A separate computation may therefore be required to identify the accounting period profits of the property rental business.

For example:

A Plc, a UK REIT group, consists of Principal Company A, company B with residual business, subsidiaries C and D both with property rental business (PRB). A has external borrowing to finance the group’s activities and B incurs expenses providing services to the group. A does not charge the finance costs to its subsidiaries whilst B recharges its costs.
- Year ended 31/12/2016.
- Company A incurs finance costs £200 referable to C’s PRB and £200 referable to D’s PRB.
- Company B recharges £100 costs to C and £200 to D.
- PRB profits per accounts are Company C £5000 and Company D £4000.
C

D

Profits per IAS accounts

5000

4000

Intra-group adjustments

-200

-200

Profits for PRB

4800

3800

The accounting period profits are £8,600 (Company C £4800 plus D £3800).

The group’s accounting period profits of the property rental business are computed taking the worldwide profits (see IFM21020 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm21020)) as shown in the accounts of C and D and adjust for any costs of the property rental business accounted for elsewhere in the group. This includes company A’s finance costs relating to C and D’s activities which were not recharged. The expenses of company B relating to C and D’s activities were recharged so no adjustment is required for this.

The financial statements under CTA2010/S532(2)(a) will show PRB profits £9300 (Company C £5100 plus D £4200; intra-group charges from Company B are ignored and no adjustments are made).

Where a group REIT holds say 75% of a company any adjustments made in respect of intra-group recharges will relate only to the amount referable to that 75% holding. In the example above, if A held 75% of C then the accounting period profits of C are £3750 (75% of £5000) and the adjustment referable to C’s PRB is £150 (75% of £200).

The group’s worldwide accounting period profits of the property rental business are then compared with the “aggregate profits” provided by the financial statements.