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HMRC internal manual

Guidance on Real Estate Investment Trusts

Property rental business income: loan relationships and derivative contracts: interest and netting off



Section 599(3) CTA 2010 allows credits and debits from loan relationships and derivative contracts to be taken into account in arriving at profits of the property rental business, so far as the loan relationship or derivative contract relates to property rental business. Note however that this does not allow interest to be included in the profits of the property rental business in the way that for example, interest on working capital is included in the profits of a trade.


In particular, interest received on funds held at the bank awaiting reinvestment falls outside the property rental business and is part of the income of the residual business. See also GREIT09010 regarding the treatment of funds awaiting re-investment for the purposes of the 75/25 balance of business income and asset tests.

The reasons for this are as follows. Rules that apply for trading income apply also to computing the profits of a property income business, unless otherwise provided (section 210 CTA 2009). One such exception is section 211 CTA 2009. The partial set-aside of this exception for the profits of a property rental business means that interest payable can be deducted in computing the property income profits. What the set-aside cannot do is re-characterise loan relationship income as property rental income.

This is different from loan relationships for the purposes of a trade where the credits in respect of the relationship are treated as credits of the trade and the debits of the relationship are treated as debits of the trade (see section 297 CTA 2009)

The netting off that normally applies for non-trading loan relationship debits and credits (section 301 CTA 2009) does not apply here either. When the prohibition on loan relationship debits and credits is partially lifted for the property rental business the effect is to take into the property rental business profits computation debits and credits that relate to the property business - which will automatically rule out interest on bank deposits, because this is taxable either as part of a trade or as a loan relationship. Amounts arising to a trade (and thus outside the property rental business) cannot be netted off with amounts taken into a property business calculation.

The credits that will feature in computing the profits of the property rental business will generally relate either to derivatives or to exchange gains. Suppose for example, the company has a currency derivative (under which it has a commitment to buy dollars for sterling) to hedge part of the dollar value of its USA property portfolio. If the dollar increases in value compared to sterling, the fair value of the contract will increase and give rise to a credit that would be available to net off, in the same way that a movement the other way would give rise to an allowable deduction.