IFM22350 - Real Estate Investment Trust : Group conditions and rules: Financial Statements: financing costs
Source: gov.uk (2025-04-17)


The profit: finance cost ratio in CTA2010/S543 uses finance costs derived from the financial statements. How they are defined and computed is explained below and at IFM22355 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22355).

'Financing costs' are defined in CTA2010/S544(4) – see IFM22200 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22200) for more detail.

Joint ventures

Where there is a Joint Venture Look-Through notice in place between a venturing group and a joint venture company, the financing costs relating to the joint venture company are included in Financing Costs (All) and Financing Costs (External) of the REIT in the same way as they are for members of the Group REIT.

Financing Costs for CTA2010/S543

The statement for the property rental business (CTA2010/S532(2)(a)) must show ‘financing costs (external)’ separately from other expenses (SI 2006/2865 Reg 5(5)). Financing costs (external) are defined at SI2006/2865 Reg 6 and include the external financing costs referable to the group’s PRB in the United Kingdom (UK PRB). It is these financing costs that are included in the profit: financing costs ratio test.

Separate to this, the aggregate of the financing costs (as measured for tax purposes) referable to the group’s PRB in the United Kingdom (see IFM22200 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22200)) is included in the financial statement under CTA2010/S532(2)(b).

While the financial statement under CTA2010/S532(2)(b) will always specify profits for each member of the group, groups may be able to supply the financial statement under CTA2010/S532(2)(a) just in relation to the group if they meet certain criteria. The ‘financing costs (external)’ for the purposes of the profit: finance-cost ratio are taken from this financial statement regardless of how that statement is produced. Where the financial statement is supplied solely in relation to the group, the financing costs (external) will also only need to be shown in relation to the group.

Example

Company A is the principal company of a Group REIT and Company B is a wholly owned UK resident subsidiary.

A has borrowed 1000 from a bank at 4%, financing business that is not UK PRB with 200, UK PRB with 400 and lending 400 to B at 5%. B has also borrowed 300 from the bank at 5%, all borrowing to fund its UK PRB.

The financing costs stated separately on the statement of the group’s property rental business under CTA2010/S532(2)(a) are the financing costs paid to non-group entities and referable to the UK PRB:-

A’s financing costs are 32 (bank loan of 400 @ 4% (referable to A’s UK PRB) + 400 @ 4% (bank loan lent to B and referable to B’s UK PRB)).

B’s financing costs are 15 (300 loan from bank @ 5%): interest expense on its loan from A is disregarded as intra-group debt.

Therefore financing costs for profit: financing cost ratio are 47

However, note that the financing costs included in the financial statement of the group’s property rental business in the UK under CTA2010/S532(2)(b) includes finance costs for each group member UK PRB (as measured for tax purposes):

A’s financing costs are 16 (bank loan of 400 @ 4% (referable to A’s UK PRB).

B’s financing costs are 35 (300 loan from bank @ 5% plus 400 loan from A @ 5%)

Therefore financing costs included in the financial statement of the UK PRB providing the profit figure for the distribution condition (CTA2010/S530 see IFM22050 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22050)) are 51.