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HMRC internal manual

Company Taxation Manual

AIFs: Property authorised investment funds (property AIFs): tax treatment of Property AIFs and distributions: example of tax charge where there are excess financing costs in a qualified investor scheme


The net income of the Property Investment Business (PIB) of Property AIF ‘A’(tax-exempt) is £1,500 after deduction of £500 capital allowances and interest charges.Interest payable in respect of A’s (tax-exempt) business was £8,000 for theaccounting period.

The ‘income’ of A (tax-exempt) (as measured by regulation 69Z) is to be taken as the netincome of the PIB before the set-off of capital allowances and debits or credits of loanrelationships and derivative contracts, so for the purposes of the test A’s incomeis:

Net PIB income       1,500  
capital allowances   500      
finance charges   8,000      
‘Income’ for purposes of Reg 69Z   10,000      

The top line of the fraction (‘Income’) would therefore be 10,000. Financingcosts = £8,000 so the bottom line of the fraction is 8,000. The ratio would therefore be10,000/8,000 = 1.25. In this scenario, there is no breach of the 1.25 lower limit (abreach is when the fraction is below 1.25), so no tax charge arises.

But what if instead of £8,000 the finance charges were £9,000? In that scenario, theratio would be 10,000/9,000 with the result being 1.11. This is less than the 1.25 limit,and a tax charge will therefore arise.

Regulation 69Z9(6) sets out four steps to be followed in calculating the amount to becharged to tax.

  • Step one is to work out the theoretical financing costs that would just meet the 1.25 limit (regulation 69Z9(6) step one). The first part of the example above gives us the answer in this case, but in other circumstances the answer can be calculated as: theoretical financing costs = 4 x P where P is PIB profits after capital allowances but before financing charges have been deducted. Therefore in the example P is £2000 (£1500 net PIB, plus shadow capital allowances £500) and the interest expense that just meets the limit in this example is £8,000 (4 x £2,000).
  • Step two is to determine the excess financing costs. In this case £9,000 less £8,000 giving £1,000.
  • Step three is to calculate the multiplier. Given a main CT rate of 28% and a rate applying to open-ended investment companies of 20%, this will be 1.4
  • Step four is to multiply the excess financing costs by the multiplier.

In this case we get £1,000 x 2.8 = £1,400, which is the amount charged to corporationtax.