CFM97710 - Interest restriction: property and REITs: overview
Source: gov.uk (2025-04-17)


TIOPA 2010/S452

The corporate interest restriction (CIR) applies to Real Estate Investment Trusts (REITs) and may restrict the amount of tax-interest the REIT may deduct in computing the income of its property rental business in the UK (‘PRB’), which is exempted from corporation tax (CT), the taxable income of its other, residual business or both. See IFM21020 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm21020) for further information on the property rental business activities that are exempt from CT for a REIT.

The rules which determine how the CIR is to be applied to REITs are in TIOPA10/S452. This legislation applies at the level of a single company, which may be either a member of a group UK REIT or a single company UK REIT. Where a CIR disallowance is allocated to such a company, S452 applies.

Where the CIR disallowance is allocated to the PRB, the normal effect is to increase the property income distributions (PID) that must be paid to REIT shareholders. The amount allocated to the PRB is limited to an amount that wouldn’t require a distribution that cannot legally be paid. Where an amount of CIR disallowance that could have been allocated to the PRB isn’t, either because it would create a distribution that could not legally be paid or because the REIT chooses not to allocate it to the PRB, that amount is effectively taken out of the scope of the REIT exemption through a mechanism which creates tax-interest income of the residual business of the REIT, which is subject to CT.

Background

The REIT rules are a special regime which can apply to a company, or group of companies, which owns and manages property on behalf of shareholders. Guidance on REITs is within the Investment Funds Manual starting at IFM21000 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm21000).

The key aspects of the regime are:
- The REIT must invest mainly in property. The profits and gains of the PRB of a UK REIT company or member of group UK REIT, as measured for tax purposes, are exempt from CT (CTA2010/S534, S535 and S535A).
- The REIT must pay out 90% of the profits of its PRB to shareholders every year as a PID. Such PIDs are paid either gross or net according to the status of the shareholder. The PIDs paid to shareholders who are liable to UK tax are treated as property income of the recipient and subjected to CT or IT where applicable.
- In addition, a PID received by one UK REIT from another UK REIT must be paid out to shareholders in full every year as PID, separately from the 90% requirement.
- A relaxation of this distribution requirement may apply where the REIT could not legally distribute 90% of the profits of its PRB.
- The REIT may also carry on activities that are not part of the PRB. Profits and gains from other activities, referred to as ‘residual business’, are not exempt and are subject to CT in the normal way.
- A group UK REIT may include non-UK resident companies and the profits of their UK PRB is within the scope of the exempted PRB.
- The principal member of a group UK REIT or a single company UK REIT must always be a company that is tax-resident in the UK and not also tax-resident in another tax jurisdiction.
- The computation of profits for the purposes of calculating the PID is prepared on the basis of isolating the profits of the group’s property rental business in the UK (comprising the property rental business of a UK company, even if carried on outside the UK, and the UK property rental business of a non-UK resident company) from any residual business. There is also a ring-fence (see IFM21015 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm21015)+) which limits offset of losses, etc. between this PRB and any residual business. In applying these rules, the PRB may be deemed to be carried on by a separate company.
Application of the CIR rules

In applying the CIR rules in the context of a REIT, the normal rules apply, subject to the following modifications (TIOPA2010/S452):
- A company that is a member of a group UK REIT or is a single company UK REIT (referred to in this guidance as 'the actual company') is for most purposes treated as consisting of two companies, in line with the approach in the REITs regime. One deemed company, the 'property rental business company' carries on the PRB and the other, 'the residual business company' carries on all other business of the company falling within the ambit of CT.
- An actual company that only has a PRB, or has other business but that other business is not within the scope of UK CT, may be deemed to have a residual business, such that there would still be a deemed PRB company and a deemed residual business company that is within the scope of CT.
- Within a group UK REIT, the deemed PRB companies and the deemed residual business companies are treated as being part of the same CIR worldwide group.
- The CIR group should treat the PRB as not exempt from CT when calculating the group's CIR disallowance – see CFM97715 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97715). But any other business that is not within the scope of CT remains outside the scope of CT when calculating the group's CIR disallowance, for example, the overseas property rental business of a non-UK resident group member.
- For the purposes of the public infrastructure rules within the CIR, the deemed PRB company and deemed residual business company are treated as being the same company, so that a single election made by the actual company would apply to both: TIOPA2010/S452(3)(b).
Note in particular the following:
- The treatment of loan relationships and derivative contracts amounts relating to the PRB is modified for the purposes of computing CIR disallowances. Refer to CFM97715 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97715).
- The actual company may choose how to allocate the CIR disallowance - see CFM97720 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97720) - but this is subject to certain limits - see CFM97730 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97730)
- To the extent that a CIR disallowance is not allocated to the PRB company, it must be allocated to the residual business company and could result in the creation of taxable income - see CFM97740 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97740) and the examples at CFM97745 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97745) and CFM97746 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97746).
- Certain information should be provided on the group's Interest Restriction Return - refer to CFM97750 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97750).
- Where a group UK REIT includes non-UK resident companies carrying on a UK property business, see CFM97760 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm97760).
Interaction with REIT Profit: Financing-cost ratio

The legislation for UK REITs in CTA2010/S543 sets a limit on the amount of financing costs it can pay in connection with its PRB. A tax charge is incurred if this limit is exceeded (see IFM22200 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22200)). Any amount charged as a result of S543 is treated for the purposes of the CIR rules as if it were tax-interest income (TIOPA2010/S452(4A)). The order of operation of the rules is therefore that any charge under the REIT rules in S543 is calculated first. If a charge arises, it should then be taken into account when calculating any CIR disallowance. Any CIR disallowance that is then allocated to the group UK REIT does not give rise to any further need to consider the rules at S543 (CTA2010/S544(4A)).

Example

A UK group REIT exceeds the profit: financing-cost ratio and incurs a charge under CTA2010/S543 on the excess of £2 million. This excess is taxed as profits of the residual business.

For the purposes of the group CIR calculations, the £2 million is treated as tax-interest income. Whatever the outcome of those calculations for CIR, the charge under S543 on the original excess of £2 million will not change. So if the CIR calculations lead to a CIR disallowance of £1 million being allocated to the PRB of the REIT, this £1 million will be taken into account when calculating the amount of exempt profits under CTA2010/S599 but it will not change the amount of the charge originally calculated under S543.