739LAA Profit: financing cost ratio 1 January 2020

Summary

This section applies from 1 January 2020 and provides a modified version of section 739LA.

Details

Main definitions

(1) “adjusted property financing costs” means the property financing costs less any amount of income referred to in subsection (2)(b);

“annual IREF profits” means the profits, gains or losses of an IREF business as per the income statement of the IREF but not including any realised or unrealised profits, gains or losses of an asset where the disposal of such an asset would be considered a disposal of a chargeable asset for capital gains tax or corporation tax purposes and would otherwise form part of the relevant profits of the IREF which are not chargeable to tax under section 739C.

“property financing costs” means costs of debt finance or finance leases which are taken into account in arriving at the profits of an IREF including interest, discounts, premiums or swap/hedging costs and fees or other expenses associated with raising debt finance or finance leases;

“property financing costs ratio” means the ratio of the sum of profits of an IREF plus the adjusted property financing costs of an IREF to the adjusted property financing costs of the IREF;

“relevant cost” means an amount which would be the allowable deduction for the purposes of CGT under section 552 as if references in section 552(3) to ‘borrowed money’ meant borrowed money which is third-part debt;

“specified debt” means any debt incurred by an IREF in respect of amounts borrowed or advanced to an IREF or a portion of any debt incurred by a partnership in which the IREF is a partner which is calculated as the higher of the portion of the capital or profits of the partnership in which the IREF holds or is entitled to.

(2) Where the total specified debt of an IREF exceeds 50% of the relevant cost of the IREF assets then the IREF shall be treated as receiving an amount of income equal to –

A is the property financing costs

B is the excess specified debt

C is the total specified debt

(3)(a)(i) and (3)(b)(i) Where for an accounting period the property financing costs ratio of an IREF is less than 1.25:1 then the IREF and the sum of the annual IREF profits and the adjusted property financing costs is greater than zero then the IREF will be treated as receiving an amount of income equal to the amount by which the adjusted property financing costs would have to be reduced for the ratio to equal 1.25:1.

(3)(a)(ii) and (3)(b)(ii) Where the sum of the annual IREF profits and the adjusted property financing costs of the IREF is zero or lower then the IREF will be treated as receiving an amount of income equal to the adjusted property financing costs.

(4) The amounts of income referred to in subsection (2) and (3) are charged to income tax under Case IV Schedule D and are treated as income arising in the year of assessment in which the accounting period which the amount was taken into account ends and against which no loss, deficit, expense or allowance can be off set.

(5) This subsection disapplies corporation tax to any amounts to which the IREF has been charged to income tax and also clarifies that a transaction with an IREF is not exempt from transfer pricing rules.

(6) Section 739LA does not apply to an accounting period to which this section applies. This section applies to accounting periods commencing on or after 1 January 2020 and where an accounting period commenced prior to that date but ends after that date it shall be split in two, one beginning on the date on which the accounting period begins and ending on 31 December 2019 and the other beginning on 1 January 2020 and ending on the date on which the accounting period ends.

Relevant Date: Finance Act 2019