CFM97720 - Interest restriction: property and REITs: allocation of disallowances
TIOPA10/S452
The total CIR disallowance that may be allocated to a company that is a member of a UK group REIT or which is a company UK REIT (referred to here as the ‘actual company’) may not exceed its actual net tax-interest expense. But the actual company can decide how the CIR disallowance should be allocated, subject to certain restrictions, between its:
- property rental business (PRB); and
- the residual business (which is deemed to exist even where there is no actual residual business).
The actual company is deemed to comprise of two companies: the PRB company and the residual business company.
CIR disallowances allocated to the PRB company
The amount of the CIR disallowance that is allocated to the PRB company is taken into account in calculating the amount of the PID that a company UK REIT or the actual company or principal member of a group UK REIT must make to its shareholders.
The CIR disallowance allocated to the PRB company cannot exceed the net tax-interest expense of the PRB of the actual company, following the normal rule in TIOPA10/SCH7A/PARA22(3)(a).
Also, a restriction on the amount of CIR disallowance that may be allocated to the PRB company may arise through the application of rules which deal with the interaction between the CIR and the distribution requirement in the REITs provisions, see CFM97730.
CIR disallowances allocated to the residual business company
The amount of the CIR disallowance allocated to the residual business company will affect the calculation of the taxable profits of the residual business company, and hence will feed through to the actual CT liability of the actual company.
The upper limit of the CIR disallowance that may be allocated to the residual business company is the net tax-interest expense of the actual company. This amount may exceed the net tax interest expense of the residual business where the group has allocated no CIR disallowance or less than the full amount of the CIR disallowance to the deemed PRB company. Thus, the residual business company is able to ‘take on’ any CIR disallowance that the group allocates to the actual company.
Guidance on the rules that apply in this scenario is at CFM97740.