CFM97760 - Interest restriction: property and REITs: corporate non-resident landlords
Before 6 April 2020
For periods before 6 April 2020, non-resident companies carrying on a UK property business would be outside of the scope of CIR because they are not subject to CT.
REITs
For non-resident landlords (NRLs) that are part of a REIT group, there is a difficult interaction between the REIT and CIR rules. HMRC will accept that a NRL within the REIT rules is outside the scope of the CIR provisions. As a result, where the NRL incurs interest (and other financing costs) in its PRB, these do not constitute tax-interest expense amounts for the purposes of the CIR rules. The CIR calculations for the group should not include any amounts of either tax-interest or tax-EBITDA in respect of the PRB of a NRL.
Groups that have filed IRRs on the basis that the NRL members of a group REIT are within scope of the CIR are not required to submit revised IRRs.
From 6 April 2020
For periods after 6 April 2020, non-resident companies and NRLs are brought into the charge to CT in respect of a UK property business.
It therefore follows that where an NRL incurs interest (and other financing costs) in its UK property business, these constitute tax-interest expense for the purposes of the CIR rules. The CIR calculations for the group should include amounts of both tax-interest and tax-EBITDA in respect of a NRL company.
The transitional rules at FA19/SCH5/PARA37(3)(b) provide that unrelieved income tax losses arising before 6 April 2020 are to be relieved against UK property business profits and related loan relationships and derivative contracts charged to CT for periods beginning on or after 5 April 2020. Such losses are excluded amounts in the computation of tax-EBITDA (S407(1)(ga)).
REITs
S452 operates in respect of a NRL in the same way as a resident company carrying on a UK property rental business.
Where CIR disallowance is allocated to the PRB of an NRL, which is a member of a group UK REIT, this will increase the UK group REIT’s PRB profits and therefore the PID that the principal member will be required to pay to satisfy the REIT distribution condition requirements of CTA10/S530(1), see CFM97730. If there would be a legal impediment to the payment of a dividend sufficiently large to satisfy the REIT distribution condition, S452(5)(b) may come into play and a CIR disallowance would need to be allocated to a deemed residual business company. Alternatively, the NRL may choose to allocate some or all of its CIR disallowance to a deemed residual business company.
Where this is the case, the creation of tax-interest income by S452(7)(b) (see CFM97740) provides a mechanism for still giving effect to the CIR disallowance. This mechanism results in the NRL having a non-trading loan relationships credit that falls within the UK CT net by virtue of CTA09/S5(3A)(b).
Less commonly encountered tax-interest income amounts (for instance deemed finance leasing income), that meet conditions C and D in S385 should fall within CTA09/S5(3A)(a).
In either case, the amounts would fall to be treated as income from immovable property under UK Double Tax Agreements. The application of deeming provisions to bring the amount into the charge to tax does not prevent the treaty taking effect in accordance with the nature of the underlying income that gives rise to the tax charge, as clarified by the Supreme Court judgement in Fowler v HM Revenue and Customs, [2020] UKSC 22, see in particular paragraph 30.