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HMRC internal manual

Guidance on Real Estate Investment Trusts

Group conditions and rules: Financial Statements: financing costs


Paragraph 14 Schedule 17 FA 2006 uses amounts called Financing Costs (All) andFinancing Costs (External) as part of the interest cover test in section 115, as modifiedfor groups. These amounts are derived from the three sets of financial statements. Howthey are defined and computed is explained below and at GREIT12155.

Financing costs’ are defined in section 115(4) FA 2006 and include finance leasing costsas well as interest – see GREIT02200 for more detail.

Joint ventures

Where there is a Joint Venture Look-Through notice in place between a venturing groupand a joint venture company, the financing costs relating to the joint venture company areincluded in Financing Costs (All) and Financing Costs (External) in the same way as theyare for members of the Group REIT.

Where a Joint Venture Look-Through notice is in place between a venturing company and ajoint venture company, the interest cover test for the UK-REIT is modified by regulation6(4) SI 2006/2866. This replaces the formula in section 115(2) FA 2006 to take account ofthe financing costs associated with the joint venture company (see GREIT13035). The same steps as described in GREIT12155 for working out Financing Costs (External) apply.

Financing Costs (All)

This amount is worked out from the financial statements for G (tax-exempt). Thestatement has to show financing costs separately from other expenses (regulation 5(2) SI2006/2865. The aggregate of the financing costs (as measured for tax purposes) of thetax-exempt business of each member of the group is Financing Costs (All).

For example, A is the principal company of a Group REIT and B is a wholly-ownedsubsidiary. The income from A’s property rental business is 500 and from B’s is600. A has borrowed 1,000 from a bank at 4% and has lent 400 of this to B at 5%. B hasalso borrowed 300 from a bank, also at 5%. Financing Costs (All) is the sum of A’sinterest that relates to its tax- exempt business (bank loan 600 @ 4%) and B’sinterest that relates to its tax-exempt business (loan from A 400 @ 5% + bank loan 300 @5%) = 24 + 20 + 15 = 59.