Annex 1: Minor changes in the law Change 42: UK REITs: conditions as to property rental business: exclusion of non-member’s interest: section 529 Example 2
Company A (the principal company of the group) has a property worth £25. Company B (wholly owned subsidiary of A) has a property worth £30. Company C(75% subsidiary of A) has a property worth £45. The remaining 25% interest in C is held by a non-member of the group.
If 100% of the value of C’s property is taken into account, the 40% test is failed (45 is more than 40%x(25+30+45)). If only 75% of the value of C’s property is taken into account, the 40% test is passed (33.75 (75%x45) is not more than40%x(25+30+33.75)).
It is easier in general to pass the 40% test if the interest in the subsidiary’s property is restricted to the extent of the parent’s holding. And applying the test in that way follows the economic reality of the relationship.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.