IFM04350 - IFM04350 AIFs: Property authorised investment funds (PAIFs): tax treatment of PAIFs and distributions: excess financing costs in a qualified investor scheme (QIS)
The need for special rules for PAIFs that are also QIS (regulation 69Z9 SI2006/964)
There are special rules in place to reduce the scope for extracting profits of the tax-exempt business as interest instead of property income distributions. The rules apply to PAIFs that are QIS. The reason that there is no need for a similar tax rule for other PAIFs is that the Financial Services Authority restricts their borrowing to reduce risk to the investors.
The Income to Financing Costs calculation
Regulation 69Z9 SI 2006/964 sets a limit on the ratio of the net income of the tax exempt property income business (PIB) to the company’s financing costs. This works as follows:
- Check whether the limit has been breached by dividing ‘Income’ by ‘Financing Costs’.
- Where the result of the calculation is less than 1.25 then the limit is breached.
- If the limit is breached, a tax charge by reference to the excess financing costs is charged on the residual part of the business of the QIS.
The meaning of ‘Income’
‘Income’ means the amount of the net income of the Property Investment Business arising in the accounting period, before the set-off of capital allowances, losses brought forward from a previous accounting period, or amounts taken into account as debits or credits of loan relationships and derivative contracts.
The meaning of ‘Financing Costs’
‘Financing costs’ means the amount of the financing costs incurred in the accounting period that relate to the Property Investment Business (see IFM04130).
Regulation 69Z9(7) SI 2006/964 defines “financing costs” for the whole of this regulation as those costs that would generally be considered to be costs arising in respect of a financing transaction under GAAP.
The charge to tax
The rules for determining the amount of the tax charge where the limit of 1.25 is breached are detailed on the following page (IFM04355).