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Corporate interest restriction ‘devil is in the detail’ – REITs

Corporate interest restriction ‘devil is in the detail’

This week we look at the application of the CIR rules to real estate investment trusts.


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This is the twenty sixth in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation was included in Finance (No.2) Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. We stay with the theme of CIR and real estate this week, with a look at the special considerations for a UK resident property company or group that qualifies as a UK real estate investment trust (REIT). Where a qualifying property company or group has elected to be a REIT, income profits and capital gains of the qualifying property rental business are exempt from corporation tax. Notwithstanding the fact that the property rental income is tax exempt, a REIT is still required to apply the CIR rules.

Key aspects of the UK REIT tax regime

The key aspects of the REIT regime are as follows:

  • The main business of the REIT must be a property rental business (PRB);
  • The REIT must pay out at least 90 percent of its (notional) taxable profits from its PRB to its shareholders each year as property income dividends (PIDs) - if there are insufficient reserves to make the PIDs, the amount of distribution is limited to the distributable reserves;
  • Any CIR disallowance allocated to the PRB will increase the (notional) taxable profits and the required PID;
  • The PIDs are treated as UK property income of the recipient and taxed accordingly; and
  • The REIT may also carry on a non-qualifying property rental business and this is treated as though it were carried on in a separate company (the residual business company) distinct from the PRB company.

CIR rules amended for UK REITs

If interest is disallowed under the CIR rules, there is a series of steps to allocate this between the PRB and any residual business carried on by the REIT. There is some flexibility in this allocation which can impact the distributions to be made from the PRB.

The normal CIR rules are amended for REITs as follows:

  • The PRB company and the residual business company are treated as separate members of the same CIR worldwide group;
  • The CIR calculations are prepared on the assumption that the PRB profits and gains are not exempt from corporation tax;
  • Any interest disallowance must be allocated between the PRB company and the residual business company;
  • The whole, a part or no amount of the disallowance may be treated as arising in the PRB company, subject to the maximum tax interest expense disallowance that can be allocated;
  • The maximum disallowance of tax-interest expense that can be allocated to the PRB company is limited to the lower of:
    • The net tax-interest expense of the PRB; and 
    • Such amount as will still leave the PRB with sufficient reserves to distribute the minimum required PID (at 90 percent of the resulting notional taxable profits of the PRB);
  • There is no minimum amount of disallowance that must be allocated to the PRB, which provides some flexibility in terms of the amount of dividends that the REIT will pay out to its investors;
  • The remaining interest expense disallowance is allocated to the residual business company; and
  • If the amount allocated exceeds the net tax-interest expense in the residual business company, computational adjustments are made to increase the taxable profits, on which tax is payable, to reflect the allocated disallowance.

The previous articles in this series can be found here.

For further information please contact:

Ruchi Agarwal

Rob Norris

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