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HMRC internal manual

Corporate Finance Manual

Debt cap: particular types of company: real estate investment trusts

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Treatment of UK-REITs

A company or a group of companies may, if it carries on a qualifying property business and satisfies certain conditions, become a Real Estate Investment Trust (referred to in HMRC guidance as a UK-REIT). Full details of the UK-REIT regime are to be found in the Guidance on Real Estate Investment Trusts (GREIT) manual.

Qualifying activities undertaken by the UK-REIT - broadly, the exploitation of land as a source of rents - are ring-fenced. Profits from the ring-fenced activities are exempt from corporation tax, although profits from any other activities are taxed in the normal way.

In particular, a UK-REIT may pay interest for the purposes of the property business - for example, the interest may relate to money borrowed to buy a rental property. Were it not for the loan relationships rules, such interest would be an expense of the property business. FA06/S120(3) disapplies the statutory rules that would otherwise exclude loan relationships debits or credits from the property income computation. As a result, interest payable on such loans is within the tax-exempt ring-fence (see GREIT04020).

For debt cap purposes, however, it might be possible to argue that there are still loan relationships debits that constitute financing expense amounts within TIOPA10/PT7/S313. The point is put beyond doubt by TIOPA10/PT7/S317, which provides that an amount is not a financing expense amount of a company if, because of FA06/S120(3)(a) [CTA10/S599(3)(a)], CTA09/S211 does not apply to it. In other words, if interest payable by a UK-REIT is within the ring fence, it is ignored for debt cap purposes.

Section 317 also provides that, in these circumstances, amounts that would otherwise be financing income amounts are not treated as such. In practice, however, it is unlikely that financing income would be part of the ring-fenced property business: see GREIT04025, which explains that interest receivable (for example, on bank deposits) is a separate taxable subject and not a receipt of the property business.

Interest payable by company carrying on a ring-fenced property business, and which relates to that business, is also disregarded in arriving at the available amount - see CFM92400.