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HMRC internal manual

Company Taxation Manual

AIFs: Property authorised investment funds (Property AIFs): tax treatment of Property AIFs and distributions: excess financing costs in a qualified investor scheme (QIS)

The need for special rules for Property AIFs that are also QIS (regulation 69Z9 SI2006/964)

There are special rules in place to reduce the scope for extracting profits of thetax-exempt business as interest instead of property income distributions. The rules applyto Property AIFs that are QIS. The reason that there is no need for a similar tax rule forother Property AIFs is that the Financial Services Authority restricts their borrowing toreduce risk to the investors.

The Income to Financing Costs calculation

Regulation 69Z9 SI 2006/964 sets a limit on the ratio of the net income of the taxexempt property income business (PIB) to the company’s financing costs. This works asfollows:

  • to check whether the limit has been breached, ‘Income’ is divided by ‘Financing Costs’,
  • where the result of the calculation is less than 1.25 then the limit is breached,
  • if the limit is breached, a tax charge by reference to the excess financing costs is charged on the residual part of the business of the QIS.

The meaning of ‘Income’

‘Income’ means the amount of the net income of the Property InvestmentBusiness arising in the accounting period, before the set-off of capitalallowances, losses brought forward from a previous accounting period, or amounts takeninto account as debits or credits of loan relationships and derivative contracts.

The meaning of ‘Financing Costs’

‘Financing costs’ means the amount of the financing costs incurred in theaccounting period that relate to the Property Investment Business (see CTM 48813).

Regulation 69Z9(7) SI 2006/964 defines “financing costs” for the whole of thisregulation as those costs that would generally be considered to be costs arising inrespect of a financing transaction under GAAP. So, it includes all debits and credits inrespect of debtor and creditor loan relationships of the company under Part IV FA 1996 andderivative contracts within Schedule 26 FA 2002 and the exchange gains and lossesattributable.

The charge to tax

The rules for determining the amount of the tax charge where the limit of 1.25 isbreached are detailed on the following page (CTM48836).