IFM25033 - Real Estate Investment Trust : Capital gains: computational rules: Company ceasing to be a member of a group (disposal of shares): CTA2010/S559 and S579

Where a Group disposes of property by disposing of the shares in a subsidiary there is a deemed disposal and reacquisition of the property at market value by the property rental business (CTA2010/S579(4) & (5)) and, usually, for disposals before 6 April 2019, a disposal of the shares in the subsidiary by the residual business. A gain/loss on disposal of shares in a UK property rich company on or after 6 April 2019 is treated as arising within the property rental business with an exemption provided by CTA2010/S535A (see IFM25007).

The gain or loss arising on the deemed disposal by the property rental business is exempt by CTA2010/S535. The 3-year development rule (CTA2010/S556(3)) does not apply to this deemed disposal by the property rental business.

Tax treatment of the disposal of shares

The gain or loss on the disposal of shares is, for disposals before 6 April 2019, usually a chargeable gain or loss within the residual business. Disposals by a company that is a REIT or a member of a REIT group on or after 6 April 2019 of shares in a UK property rich company are usually not chargeable gains (CTA2010/S535A) although the 3-year development rule at CTA2010/S556(3A) may result in CTA2010/S535A not applying to the disposal (see IFM24050). Regardless of the application of these rules, in certain circumstances a gain may be treated as trading income under CTA2010/S356OD (and therefore will be taxable within the residual business).

This will be the case where: 

  • A person realises a profit or gain from a disposal of any property which (at the time of the disposal) derives at least 50% of its value from land in the United Kingdom, and
  • The person is a party to, or concerned in, an arrangement concerning some or all of the project land, and
  • The main purpose or one of the main purposes of the arrangement, is to deal in or develop the project land and realise a profit or gain from a disposal of property deriving the whole or part of its value from that land.

This legislation applies to enveloped disposals as well as direct disposals of property. Further information and examples can be found at BIM60580.

Disposal by UK group REIT to another UK group REIT

Where a UK REIT group disposes of shares in a subsidiary to another UK REIT group, there is no deemed disposal in the property rental business (CTA2010/S579(9)). There will not be a deemed disposal of the property assets for the original REIT group where the new REIT group gives a notice electing into the REIT regime no later than the date on which that subsidiary ceases to be a member of the original REIT group and the date specified in that notice is no later than the date of acquisition.

The same applies when the exiting company forms a new REIT group or single company REIT on its disposal.

For CTA2010/S579 treatment to apply, where the exiting company joins another UK REIT group, the conditions in CTA2010/S559 must be met.

On the date of the disposal, the new REIT must meet:

  • company conditions A and B in CTA10/S528.
  • property rental business conditions A and B in CTA10/S529. While property rental business condition C was introduced in CTA10/S529(2A) from 11 July 2023, the CTA10/S559 rule was not changed and only applies where conditions A and B are met.
  • the distribution condition in CTA10/S530 (in relation to the principal company of the new REIT).
  • balance of business conditions A and B in CTA10/S531.

In addition, in each case, the new REIT must meet conditions C, E and F in CTA10/S528 within a 6-month period from the date the exiting company ceased to be a member of the original group REIT (CTA2010/S559(7)).