Finance Act 2006

107 Conditions for tax-exempt business

(1) In order to be a company to which this Part applies in respect of an accounting period—

(a) the company must throughout the accounting period have a property rental business in respect of which Conditions 1 to 3 below are satisfied (whether or not it also has other business), and

(b) Condition 4 below must be satisfied in relation to that property rental business in respect of that accounting period.

(2) Property rental business of a company is “tax-exempt business” for the purposes of this Part in respect of an accounting period if—

(a) Conditions 1 to 3 are satisfied throughout the accounting period in relation to the business, and

(b) Condition 4 is satisfied in respect of the accounting period in relation to the business.

(3) Condition 1 is that the property rental business involves at least three properties.

(4) Condition 2 is that no one property represents more than 40% of the total value of the properties involved in the property rental business.

(5) Condition 3 is that the property rental business must not involve property that would fall in accordance with generally accepted accounting practice to be described as owner-occupied.

(6) For the purposes of Conditions 1 to 3—

(a) a reference to a property involved in a business is a reference to an estate, interest or right by the exploitation of which the business is conducted,

(b) a property is a single property if it is designed, fitted or equipped for the purpose of being rented, and it is rented or available for rent, as a commercial or residential unit (separate from any other commercial or residential unit),

(c) assets must be valued in accordance with international accounting standards (within the meaning of section 50(2) of FA 2004),

(d) where international accounting standards offer a choice of valuation between cost basis and fair value, fair value must be used, and

(e) no account shall be taken of liabilities secured against or otherwise relating to assets (whether generally or specifically).

(7) For the purpose of Condition 3—

(a) no account shall be taken of the fact that a property may fall to be described as owner-occupied by reason only of the provision by the company of services to an occupant who is in exclusive occupation of the property and is not connected with the company (within the meaning given by section 839 of ICTA),

(b) if the shares of one company are stapled to the shares of another, the two shall be treated as a single company, and

(c) for this purpose shares of one company are stapled to shares of another if in consequence of the nature of the rights attaching to the shares of the one company (including any terms or conditions attaching to the right to transfer the shares) it is necessary or advantageous for a person who has, disposes of or acquires shares of that company also to have, to dispose of or to acquire a holding of shares of the other company.

(8) Condition 4 is that at least 90% of the profits of the property rental business arising in the accounting period are distributed—

(a) by way of dividend, and

(b) on or before the filing date for the company’s tax return for the accounting period (see paragraph 14 of Schedule 18 to FA 1998).

(9) But—

(a) Condition 4 shall be disregarded if and in so far as compliance with it would be unlawful by virtue of—

(i) an enactment (including Northern Ireland legislation and an Act of the Scottish Parliament), or

(ii) an enactment of a jurisdiction outside the United Kingdom where the enactment is prescribed, or is of a kind prescribed, for the purposes of this paragraph in regulations made by the Commissioners for Her Majesty’s Revenue and Customs, and

(b) a distribution that is withheld in order to prevent or reduce a charge to tax arising under regulations under section 114 shall be treated for the purposes of Condition 4 as having been made.