Taxation (International and Other Provisions) Act 2010 section 452

Real Estate Investment Trusts

Section 452 explains how the corporate interest restriction rules interact with UK Real Estate Investment Trusts (REITs), which benefit from a tax exemption on their property rental profits and gains.

• A UK REIT is treated as two separate companies for interest restriction purposes: one for the tax-exempt property rental business and one for the taxable residual business, even though they are legally the same entity.
• When calculating interest restrictions, the property rental business is treated as if the normal REIT tax exemptions do not apply, and any restriction allocated to the property rental business must not force the REIT to breach its profit distribution requirements or make an unlawful distribution.
• Where the property rental business cannot absorb its full share of interest disallowance (due to the distribution requirement cap), a balancing mechanism requires the residual business to bring into account matching expense and income amounts for the excess, ensuring the group-wide restriction is properly allocated.
• Any charge on the residual business for excessive property financing costs under the REIT rules is treated as a tax-interest income amount for interest restriction purposes, and the interest restriction return must identify companies carrying on REIT property rental or residual business and explain how these special rules have been applied.

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