705H Profit: financing cost ratio

Summary

The purpose of the ratio in this section is to ensure that the financing costs of a REIT are not excessive in relation to its income. If the ratio is breached then there are taxation consequences.

Details

(1) Property financing costs are the costs of debt finance or finance leases which are taken into account in determining aggregate profits and include interest, discounts, premiums, net swap or hedging costs and fees or other expenses incurred in raising debt finance or arranging finance leases.

Property financing costs ratio is the ratio of the property financing costs plus property income to the property financing costs.

(2) A ratio of 1.25:1 is to be maintained between the income (before deducting financing costs) and the financing costs, of the property rental business.

(3)(a) The amount, by which the property financing costs would have to be reduced to ensure the ratio is equal 1.25:1, will be chargeable to tax.

(3)(b) Such amount is restricted to 20% of the property income of the REIT.

(4) In calculating the amount in subsection (3)(a), no account may be taken of any loss, deficit, expense or allowance.

Relevant Date: Finance Act 2021