Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
, see all updates

Group conditions and rules: interest cover test (profit: financing cost ratio)

The UK-REIT legislation sets a limit on the amount of interest a Group REIT can pay in connection with its tax-exempt business in much the same way as it does for single company UK-REITs - see GREIT02200. For a Group REIT, the differences are that the tax charge is imposed on the residual part of the principal company of the group, and the terms in the formula are defined in a group context (but the 1.25 limit is the same). See paragraph 14 Schedule 17 FA 2006.

For a Group REIT, the ratio is (Profits + Financing Costs(All)): Financing Costs (External).

Profits

These are the aggregate of the UK profits of G (property rental business) arising in the accounting period for which the principal company draws up financial statements as required by paragraph 31(2)(b) Schedule 17 FA 2006, before the deduction of capital allowances.

The computation of this figure is dealt with in more detail in GREIT12150.

Financing Costs (All)

These are the financing costs incurred in respect of the property rental business of G (property rental business), as set for the relevant accounting period as set out in the financial statements that are required by paragraph 31(2)(b) Schedule 17 FA 2006. The computation of this figure is dealt with in more detail in GREIT12150.

The definition of financing costs is the same as for single company UK-REITs, being:

  • interest on loans and related costs with the exception of exchange losses;
  • debits or credits arising on derivative contracts in relation to debt finance;
  • finance costs arising under finance leases; and
  • other costs that under generally accepted accounting standards are considered to arise from a financing transaction.

Financing Costs (External)

These are the financing costs incurred in respect of the UK buisness of G (property rental business), excluding intra-group financing for the relevant accounting period, again as set out in the financial statements that are required by paragraph 31(2)(b) Schedule 17 FA 2006. The computation of this figure is dealt with in more detail in GREIT12155.

Consequences of breaching the limit

If the limit is breached, a tax charge by reference to the excess interest is imposed on the residual part of the principal company (regulations 12 and 13 SI 2006/2864) in the same way as the charge imposed on a single company UK-REIT that breaches the limit - see GREIT02205 for detail. This tax charge may be waived in particular circumstances see GREIT02205 for more information.