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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Property rental business income: loan relationships and derivative contracts: interest and netting off: CAT2010/S599(3)


CTA2009/S210 states that the profits of a property business are calculated in the same way as those of a trade. CTA2009/S211 excludes loan relationship and derivative debits and credits from the calculation of profits of a property business. However this exclusion is set aside by CTA2010/S599(3) when calculating profits of the tax-exempt Property Rental Business (PRB) so far as the loan relationship or derivative contract relates to property rental business. (see IFM24020).

Note however that Section 599(3) does not re-characterise loan relationship income as property income and so does not allow interest income to be included in the profits of the property rental business in the way that for example, interest income 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 IFM29005 regarding the treatment of funds awaiting re-investment for the purposes of the 75/25 balance of business income and asset tests.) 

Netting off

The netting off that normally applies for non-trading loan relationship debits and credits (CTA2009/S301) does not apply. 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.  For example suppose 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.