IFM24060 - Real Estate Investment Trust : Property rental business income: investment/trading borderline: 3-year development rule: interpretations: CTA2010/S556
Source: gov.uk (2025-04-17)


HMRC interpret terms used in CTA2010/S556(3) the” three year development rule” as follows:

Development

Development can be either building a property on land owned by the REIT group/company, additions to existing property or significant refurbishment/ upgrading of a property that goes beyond repairs and renewals. If the expenditure has qualified as a deduction for repair or renewal in the property business, it is unlikely that it would be regarded as ‘development’ for this rule. Guidance on capital/ revenue nature of repairs etc. can be found in the Property Income Manual (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim).

30% of the cost

The legislation is concerned with the development undertaken by the REIT. It follows that where the company joins the regime with property undergoing development or a UK-REIT acquires a property being developed that the relevant costs for the REIT are incurred subsequent to joining the regime or acquiring the property.

Note that the conditions refer to the development. This means that each development is looked at individually to see if the 30% limit has been breached. The costs should include not just the main contractor costs (site acquisition, construction plant etc.) but also all the associated fees and other costs (excluding interest) that are capitalised and included in fixed assets in the accounts. Costs should exclude capitalised interest and any costs/fees for which a deduction is claimed in the property business computation.

For example, company C acquires a property on 1 July 2013 for 1,000 having joined the regime on 1 January 2013. The property is rented out and falls within the property rental business. In May 2014, C completed an extension to the building which cost 350. In September 2016, a further extension costing 250 was added. C sold the property for 2,100 in November 2017.

The first development does exceed the 30% limit, but the disposal is more than three years after its completion. The disposal is within three years of completion of the second development, but for this development, the cost does not exceed 30% of the cost of acquisition. The three year development rule does not apply in this example.

Completion

The 3-year development rule is not intended to apply to developments completed before entry into the REIT regime.

The 'completion of the development' takes its ordinary meaning, it is an objective test as to whether or not the development is finished. Where development work of any more than an insignificant amount is undertaken, it is likely that a certificate of completion will be issued once the building or the extension is ready for occupation or handing over to the tenant to fit out to their own specification. In many circumstances, that certificate will be accepted as marking ‘completion’ of a development for the purposes of section 556(3)(c). However, this will not always be the case.

In some circumstances, other markers may be more appropriate, for example where a project is being developed in phases. Depending on the nature of the development and the spacing in time of the phases, completion for each part of the project may be at an earlier date than the certificate of completion of the entire project. Where the property is sold part way through development, the facts may show that the disposal of the property by the REIT marks the completion of a phase of development with the remaining phases continuing after the disposal.

Where the disposal takes place before the issue of a certificate of completion, whether or not the development has been completed for the purposes of S556(3)(c) will depend on the facts in each case.

Disposal prior to completion

S556(3) removes the need to consider intention when significant development works have been undertaken and the property is disposed of within 3 years of completion of those works. Where a disposal takes place prior to completion of the development it will be necessary to fully consider the facts, including intention, to determine whether any gain or loss on the disposal is exempt or arises to the residual business.

Commencement

Commencement of development, for the purposes of CTA2010/s556(3ZA)(c) and s556(3AA)(c)) (“the beginning of the accounting period in which the development commenced”), is not defined in the legislation and takes its ordinary meaning. Whether the development has commenced is an objective test.

The date on which development commences will be the date the physical works commence. This includes the preparation of land as a site for construction for the development.