CFM97730 - Interest restriction: property and REITs: limit on disallowance allocated to property rental business

TIOPA10/S452(5), CTA10/S530(3)(b), (5)

One of the key features of the REIT rules is that REITs must pay out 90% of the profits of their PRB (plus 100% of any PIDs received from other UK REITs) to shareholders every year as a PID. In calculating these profits, all the normal CT rules, including the CIR, must be applied, except where otherwise provided.

In the case of a group UK REIT, the profits in question are the profits of the (worldwide) PRB of UK members of the group, plus the UK PRB of other members as measured for UK CT purposes, applying CTA10/S599. (See IFM21020, IFM22050 and IFM22360)

There are provisions in the REIT rules to deal with a situation where a REIT has insufficient reserves to make the necessary PID. In this case, the amount of the distribution requirement is limited to the amount that may be distributed without legal restriction (CTA2010/S530(3) and (5)). (Guidance on the operation of S530 can be found at IFM22050 onwards.)

S452(5)(b) provides that the allocated CIR disallowance must be limited to such amount as secures that neither subsection (3)(b), which is applicable to a member of a UK group REIT nor subsection (5) of CTA10/S530, applicable to a company UK REIT, applies. Where these REITs provisions are in point before considering the effect of the CIR, none of the CIR disallowance can be allocated to the PRB company.

In applying S452(5)(b) to a member of a group UK REIT, CTA10/S530(3)(b) should be read in conjunction with S530(1) such that the limit applies only to the extent that the inability of a subsidiary to make a distribution would limit the ability of the principal company of the group UK REIT to pay a sufficient PID.

If the allocation of the CIR disallowance to the PRB company is limited, the allocation of the CIR disallowance to the residual business company might then exceed that residual business company’s net tax-interest expense. See CFM97740 for an explanation of how to deal with the CIR disallowance that is allocated to the residual business.

Example

Consider the most straightforward case, a company UK REIT, which is for CIR purposes, a single company worldwide group.

The actual company has tax-EBITDA of £20 million and net tax-interest expense of £12 million. The maximum distribution it can legally make is £10 million and PRB profits (before any CIR disallowance) are £7.5 million.

To ensure that the PID is sufficient to satisfy the requirements of the REIT rules, the maximum CIR disallowance that can be allocated to the deemed PRB company is £3.6 million. This would increase the PRB profits from £7.5 million to £11.1 million. This would lead to a requirement to make a PID of £10 million (90% of £11.1 million). The balance of the CIR disallowance must be allocated to the deemed residual business company.

The actual company does not have to allocate any amount of the CIR disallowance to the deemed PRB company; it can choose to allocate the full amount of the CIR disallowance to the deemed residual business. In that case, it simply distributes 90% of its PRB profits of £7.5 million, that is £6.75 million.