IFM25007 - Real Estate Investment Trust : Capital gains : Indirect disposal of property rental business assets: CTA2010/S535A and S535B
Source: gov.uk (2025-04-17)


Exemption from tax for gains on disposals of interests in UK property rich companies and relevant funds

For accounting periods beginning on or after 6 April 2019 an appropriate proportion of gains arising on disposals of interests in UK property rich companies by a UK REIT, or a member of a UK REIT, are not chargeable gains (CTA2010/S535A).

Section 535A also applies to disposal of rights and interests in a UK property rich ‘relevant fund’, meaning:
- an entity within TCGA92/SCH5AAA/Para 8. These are offshore collective investment vehicles (CIVs) which are transparent for income tax purposes, excluding partnerships, and that have not made an election for transparency for TCGA purposes under paragraph 8 (see CG73997S (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg73997s)),
- from 22 February 2024, a co-ownership authorised contractual scheme (CoACS) within the meaning of FISMA2000/S235A and S237(3) (see IFM08130 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm08130)) that is UK property rich or a Reserved Investor Fund (Contractual Scheme) (RIF) within the meaning of F(No.2)A2024/S20 that is UK property rich.
Whether a company is UK property rich is determined by reference to the rules in Schedule 1A of TCGA 1992 (see CG73934 (https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg73934) onwards). These rules are modified by Schedule 5AAA(3) when considering whether or not a relevant fund is UK property rich.

The appropriate proportion is the proportion that (in respect of the interest that is disposed of) assets deriving value, directly or indirectly, from assets used for the purposes of the UK PRB, bear to the total assets. For this purpose the values are taken at the beginning of the accounting period, or the date of acquisition if later, valued in accordance with international accounting standards, using fair value where there is a choice and ignoring any liabilities secured against or otherwise relating to the assets.

Example

A gain of £1000 arises in the accounting period ending 31/12/21 on a disposal by UK-REIT company A of its interest in subsidiary company B. Company B’s assets at 1/1/21 consist of residual business assets value 20 and PRB assets 80. Using the value of PRB assets/value of total assets x gain (80/100x1000) results in £800 not being a chargeable gain. The chargeable gain is therefore £200.

Where the disposal is of a relevant fund then the appropriate proportion is the proportion the value of the fund’s assets, derived directly or indirectly from assets used in the PRB, bears to the value of its total assets.

Example

A gain of £1000 arises in the accounting period ending 31/12/21 on a disposal by UK-REIT company A of its units in Jersey property unit trust (JPUT). JPUT’s assets at 1/1/21 consist of property rental business assets £400 and 80% of the shares in company B, value £500 from PRB assets and £100 from residual business assets. The value of JPUTs assets, derived directly or indirectly from assets used in the PRB, is (400 + 80% of 500) £800 and total assets (400+80% of 600) £880. Using the value of PRB assets/value of total assets x gain (800/880x1000) results in £909 not being a chargeable gain. The chargeable gain is therefore £91.

Pre-April 2019 residual business losses or deficits

A company may use any unused residual business losses or non-trade deficits at 6 April 2019 in computing the amount of the gain not chargeable under CTA2010/S535A (CTA2010/S535B).

It may appear strange to use losses against a gain which is not chargeable. However by doing so the UK REIT may reduce the level of property income distribution which is paid under deduction of withholding tax. A distribution from gains, covered by losses brought forward at 6 April 2019, would be a normal dividend.

Where the gain is not covered by losses then the amount not chargeable under CTA2010/S535A will contribute to reserves under category (d) of CTA2010/S550 (Attribution of distributions). This means that any distribution from the proceeds of the disposal may need to be attributed to pot(d) (see IFM28035 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm28035)) and is then a property income distribution to which the withholding tax provisions of SI2006/2867 Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 apply (see IFM28060 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm28060)).

Where the company’s accounting period straddles 6 April 2019 then, for the purpose of determining losses at 6 April 2019, the accounting period is treated as 2 separate accounting periods. Any losses are time apportioned between the period ending 5 April and the period beginning 6 April. If such an apportionment produces an unjust or unreasonable result then the apportionment may be carried out on a just and reasonable basis.

Interaction with substantial shareholdings exemption

The substantial shareholdings exemption takes precedence over the S535A exemption (CTA2010/S535A(11)).