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HMRC internal manual

Guidance on Real Estate Investment Trusts

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HM Revenue & Customs
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Property rental business income: loan relationships and derivative contracts: partnership example

This example shows how loans made by partnerships of which the UK-REIT is a partner are treated. Company C has a 60% share of the profits of partnership P. C lends P 1,000,000 at 5%. C becomes a UK-REIT on 1 January 2010.

Loan relationship rules pre-REIT

The rules that normally apply where a corporate partner makes a loan to the business carried on by the partnership of which it is a member are in paragraph 19 Schedule 9 FA 1996. The partnership computes its profits without accounting for any loan relationship (LR) debits or credits, and these are apportioned to the corporate partners in line with their profit shares.

C’s tax computations for accounting period ending 31 December 2010 would show:

  • LR credit of interest paid by partnership 50,000 - chargeable section 299 CTA 2009
  • LR debit of 60% of the interest paid by P 30,000 - treated as non-trading LR debit
  • These two figures are offset to give a net section 299 CTA 2009 charge of 20,000.

After C becomes a UK-REIT

On and after 1 January 2010, C is divided for tax purposes into two companies; the company so far as it carries on residual business and the company so far as it carries on the property rental business.

The role of loan creditor belongs to C’s residual business since making loans is not part of the property rental business.

C’s residual business tax computations for the accounting period ending 31 December 2010 would show:

LR credit of interest paid by partnership 50,000 - chargeable section 299 CTA 2009

As long as the borrowing by P is for the purposes of the property rental business, the LR debits and credits are allowable as deductions in computing the profits of the property rental business.

If the property rental business profits of P are 650,000, then C’s share of the property rental income is 390,000. From that will be deducted 30,000 (= 60% of 50,000 LR debit) leaving 360,000 as profits of C’s property rental business.