CFM97715 - Interest restriction: property and REITs: loan relationships amounts of the property rental business
Source: gov.uk (2025-04-17)


TIOPA10/S452(4)

In applying CIR to a REIT, certain modifications are made in respect of the REIT’s tax exempt profits to work out tax-EBITDA and tax-interest.

First, the profits and gains of the property rental business in the UK (PRB) of a REIT are not charged to Corporation Tax (CTA10/S534(1) and (2), S535(1) and S535A(2)). However, for the purposes of the CIR calculation for a REIT, these rules are disapplied (TIOPA10/S452(4)) (with S535A(2) only being disapplied with effect from 22 February 2024). The effect is therefore that the PRB profits and gains of a REIT that are not charged to Corporation Tax are treated as if they are chargeable to Corporation Tax for the purposes of the CIR calculation.

Secondly, as the REITs provisions modify the treatment of loan relationships and derivative contracts amounts relating to the property rental business in the UK, there are particular considerations when applying the rule at TIOPA10/S452(4)(a).

Normally, in computing property business profits subject to tax under CTA09/PT4, amounts relating to loan relationships and derivative contracts of a property business would be left out of account and dealt with as non-trading loan relationships amounts (CTA10/S211). However, for the purposes of computing PRB profits that are exempted from CT, this exclusion is set aside so that amounts relating to the following are deducted in computing the exempted profits:
- a loan relationship so far as it relates to PRB;
- a hedging derivative contract so far as it relates to PRB; or
- embedded derivatives so far as the host contract is entered into for the purposes of PRB.
This follows from CTA10/S534(1) or (2), S534(5) and S599.

But, solely for the purpose of determining the amounts taken into account in applying the CIR, this special approach is set aside, and amounts are treated as non-trading loan relationship amounts (CTA09/S301) rather than amounts to be taken into account in calculating PRB profits (TIOPA10/S452(4)(a)).

Once any CIR disallowances of the CIR worldwide group have been calculated, allocated, and applied, CTA10/S599 applies, bringing loan relationships within the exempt PRB profit calculation. This ensures that the amounts adjusted under CIR are taken into account in computing PRB profits. This in turn feeds into the PID that is required to be paid, see IFM22050 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22050)+.

Example

A UK REIT group member, A, has UK property business profits (before loan relationship amounts) of £25 million and net non-trading loan relationship debits of £10 million relating to its PRB. With no restriction under CIR, the PRB profits (in accordance with the REIT rules at CTA2010/S599) are calculated as £15 million (being property business profits of £25 million less the loan relationship debits of £10 million).

For the purposes of the CIR calculation, the tax-EBITDA of the property business would exclude the loan relationship debits, resulting in tax-EBITDA of £25 million and the net tax-interest expense would be £10 million. The group allocates a CIR disallowance of £2.5 million to the PRB of company A.

The PRB profits for company A calculated in accordance with S599 will take into account the restricted loan relationship debits of £7.5 million (£10 million less the restriction for £2.5 million). This results in exempt PRB profits for the company of £17.5 million.