CFM97170 - Interest restriction: public infrastructure: buildings within UK property business

TIOPA10/S436(5)-(9)

A building, or part of a building, may be a public infrastructure asset of a company if the company, or another company within the worldwide group, carries on a UK property business including the building or part of the building and;

• the building or the part of the building is, or is to be, let on a short-term basis to persons, who at that time, are not related parties of the company or companies;
• the building or the part of the building has had, or is likely to have, an expected economic life of at least ten years; and
• the building or the part of a building meets the group balance sheet test.

A company can be considered to be carrying on a qualifying infrastructure activity where it is constructing a building to let and does not have an existing UK property business, but intends to have such a business once the building has been constructed.

UK Property Business

A UK property business is described in the Property Income Manual at PIM1020.

Let on a short-term basis

A building, or part of a building, is let to a person if that person is entitled to the use of the building, or part of that building, under a lease or other arrangement. This let (or other arrangement) is considered to be short-term if it has an effective duration of less than fifty years and is not considered a finance arrangement as defined by CTA10/PART16/CH2.

For the purposes of this test, references to let and leases can be read as including sub-let and sub-leases. The ‘on a short-term basis’ covers a lease or other arrangement (S436(6)). Other arrangements can cover licence income from the occupation of real estate where this would constitute UK property business income.

Example 1: University student accommodation

A university contracts with a special purpose company (SPC) to provide student accommodation. The contract for construction of the student accommodation is between the SPC and a construction company, which also owns 75% of the SPC’s ordinary share capital through a related party of the construction company. The university owns the remaining 25% of the SPC’s ordinary share capital.

The completed student accommodation is leased from the SPC to the university for 60 years in return for rent over that period. While the building forms part of a UK property business of the SPC, this is neither a short-term let, nor to an unrelated party.

However, the university then lets parts of the accommodation to students during term times each academic year. These are short-term (sub) lets to persons who are not related to the SPC. As such the student accommodation is a public infrastructure asset in relation to the SPC.

In example 1, the assumption is that university accommodation is let out to students for the whole of the year. Often university accommodation is used for other purposes outside term time. The income generated from these activities can be necessary to ensure the economic viability of the UK property business providing the student accommodation. Where these additional revenue streams are clearly a secondary function of the building, these other activities could be considered to be ancillary to the UK property business.

Example 2: Ground Rents

Company A holds the freehold of a property and has granted a 199 year lease to Company B in return for a ground rent of £2,000 per year. Company B grants a 20-year lease to a party unrelated to either Company A or B. It does not matter whether Company A and B are related.

Both Company A and B carry on a UK property business that includes the property. For both companies, the test in S436(5)(b) can be met by virtue of the 20-year lease granted by Company B in accordance with the criteria under S436(7) and (9).

Therefore, the property can be a public infrastructure asset in relation to both Company A and B. The ground rent does not prevent Company A from being a qualifying infrastructure company because it is income from the provision of public infrastructure asset, which is a qualifying infrastructure activity.

Example 3: Sale of Freehold or granting long leasehold to landlord

A company that is an existing qualifying infrastructure company (QIC) holds the freehold of a large part of a city centre. It currently lets the buildings on this site to third parties on short-term lets as part of a property business. The property consists of a mix of commercial and residential lettings.

The company identifies some of its residential units for sale to a landlord. These are sold either by disposing of the freehold or granting a long-term lease of about 200 years. The landlord continues to let out the property to third party tenants on short-term leases.

The consideration for the disposal of the freehold or the premium on granting the long-term lease is a chargeable gain event, assuming that the company is not a property trader. The gain is not considered for the purposes of the public infrastructure income test at S433(2)(a). The profits from the disposal or the premium received on the long lease will not taint the QIC status of the company. If ground rents are received as part of the disposal of a long-term lease, these would lie within the definition of S433(2)(a) and so would be income derived from qualifying infrastructure activities. This is because the property is still being let to tenants on short-term leases.

Example 4: Sale of Freehold or granting long leasehold to owner-occupiers

If in the previous example, the residential units are sold onto owner occupiers, then on the date of their disposal, they are no longer public infrastructure assets. The assumption is made that the company is not a property trader. If ground rents received from the granting of a long-term lease are significant, they could taint the QIC status of the company.

If, however, the disposal proceeds are used to redevelop some of the remaining rental units, it is possible that the sale of the residential properties could be considered necessary to facilitate the provision of public infrastructure assets. In this case, receipt of the ground rents would be income from a qualifying infrastructure activity. This would depend on the specific facts and circumstances. There would have to be a clear link that the premiums and ground rent received were for the purposes of the development of the parts of the site that were provided for infrastructure activities. See CFM97180 for further guidance and in particular, example 3 on that page.