IFM27065 - Real Estate Investment Trust : Breaches of conditions: multiple breaches: CTA2010/S577

CTA2010/S573 to S576 set out the consequences of breaching each of the regime conditions and specify how many times each condition can be breached before HMRC may issue a termination notice for the regime. This is generally two times in any ten-year period (see IFM27030, IFM27055, IFM27060).

The UK-REIT must have breached more than one of these conditions, the multiple breach rules in CTA2010/S577 set out how many breaches can occur in a ten-year period before a termination notice may be issued to the REIT.  For an example, see IFM27070. The relevant ten-year period for these purposes is explained below.

For the multiple breach rules to apply, all three of the conditions in CTA2010/S577 need to be met:

  • The UK-REIT must have breached at least two different conditions outlined in CTA2010/S528-S531(the Chapter 2 conditions), during the relevant ten-year period (condition A). 
  • The conditions which have been breached are not all contained in the same section (condition B).                                                                                                                              For the purposes of condition B, the CTA2010/S530 distribution condition is to be treated as contained in CTA2010/S529. For example, breaching the balance of business Condition A (income test) in CTA2010/S531(1) and the property rental business condition in CTA2010/S529(1) would be a breach of two different conditions, since they are in different sections. Breaching the distribution condition in CTA2010/S530 and the property rental business condition in CTA2010/S529 would be treated as breaching conditions contained in the same section.

         And

  • The REIT must have relied on some or all of the following provisions a total of four times or more during the relevant 10-year period: CTA2010/S562A(6) (see IFM27020),S563(2) (see IFM27030) and S568(1)-(2) (see IFM27055). These are provisions which allow for breaches to be ignored where specified conditions are met (condition C).

CTA2010/S577(7) lists breaches which are not to be taken into account for the multiple breaches rules, these are:

  • Breaches of company conditions C (admitted to trading or at least 70% held by institutional investors) and D (the non-close condition) of CTA2010/S528 where the reason for the breach is a REIT company becoming a member of another REIT group;
  • Breaches of company condition C when the company relies on CTA2010/S525(2) to (4) (breach on first day of accounting period 1, where reasonably expected to meet the condition in the remainder of the accounting period);
  • A breach of any of company conditions C, E (ordinary share capital) and F (loans) in respect of which CTA2010/S558(3) or S559(6) (demergers) applies;
  • A breach of balance of business Condition A (income test) in accounting period 1; or
  • A breach of balance of business Condition B (asset test) at the beginning of accounting period 1. Breaches lasting for more than one accounting period

Breaches lasting for more than one accounting period

For the property rental business condition and the balance of business conditions, a breach that continues for two consecutive accounting periods counts as a single breach for the purposes of the multiple breach rules. However if the breach lasts three consecutive accounting periods, the breach is serious and HMRC may issue a notice for the regime to cease to apply (CTA2010/S575 and S576).

Relevant ten-year period

The relevant ten-year period for the purpose of the multiple breaches rule runs from the date the company fails the condition, which may not be the same as the date of the event that triggers the failure. For example, if the UK-REIT sells all but two of its properties on 1 May 2017, property condition A is failed with effect from 1 January 2017 (assuming a 31 December accounting date). The ten-year period therefore runs from 1 January 2017 and not from 1 May 2017.

Although it may be some time before the company is aware that a breach has occurred (for instance, becoming close because of the actions of shareholders), the company must inform HMRC as soon as they do become aware (see IFM27010). For the purposes of counting up repeat breaches, either of one particular condition or multiple breaches of two or more different conditions, within the relevant time limits, the clock starts when the breach occurs, and not when the company becomes aware of it or when it notifies HMRC.