CFM97746 - Interest restriction: property and REITs: disallowance allocated to residual business exceeding its net tax-interest expense: further example

TIOPA10/S452(6) to (10)

Example 2, where there is no residual business, but for the application of S452

The facts are the same as Example 1, but unlike company A, company B has no actual business other than the PRB and no tax-interest expense other than that of the PRB.

S452(6)(b) requires a residual business company with zero net tax-interest expense to be deemed. So, the steps in S452(6) are applied on the basis that there is a deemed residual business company and that matching amounts of tax-interest expense and income can be created for that residual business company.

The steps are then as follows:

Step 1 - The total REIT expense is £10m.

Step 2 - The actual CIR disallowance allocated to the PRB company is £7m, the maximum amount permitted.

Step 3 - The remaining total REIT expenses are £3m (£10m less £7m).

Step 4 - The excess of the total REIT expenses remaining after step 3 over the net tax-expense of the residual business is £3m (£3m less £nil).

Step 5 – There is no actual net tax-interest expense of a residual business and therefore there is a created residual business company with £3m of tax-interest income and £3m of tax-interest expense.

If the maximum permitted disallowance of £7m is allocated to the PRB, there remains a further £2m of CIR disallowance to be allocated to the residual business company. Thus, there is tax-interest income of £3m less unrestricted tax-interest expense of £1m (£3m tax-interest expense less £2m CIR disallowance). Thus, the net tax-interest income that is subject to CT is £2m. The actual company must pay the CT that is due.