739LAA Profit: financing cost ratio from 1 January 2020.

(1) In this section—

“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 shown in the income statement of the IREF excluding—

(a) any realised profits, gains or losses in relation to the disposal of an asset, and

(b) any unrealised profits, gains or losses in relation to an asset,

where the disposal of such asset would be a disposal of a chargeable asset for the purposes of capital gains tax or corporation tax on chargeable gains and would otherwise form part of relevant profits of the IREF which are not chargeable to tax under section 739C;

“property financing costs” means costs, being costs of debt finance or finance leases, which are taken into account in arriving at the profits of an IREF, including amounts in respect of—

(a) interest, discounts, premiums, or net swap or hedging costs, and

(b) fees or other expenses associated with raising debt finance or arranging finance leases;

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

“relevant cost” means the amount which would be allowable as a deduction for the purposes of the Capital Gains Tax Acts under section 552 subject to the modification that references in subsection (3) of that section to “borrowed money” shall be read as if they were references only to borrowed money that is third-party debt;

“specified debt” means—

(a) any debt incurred by an IREF in respect of monies borrowed by, or advanced to, the IREF, or

(b) a portion of any debt incurred by a partnership in which the IREF is a partner, in respect of monies borrowed by, or advanced to, the partnership, calculated as the higher of—

(i) the portion of the capital of the partnership held by the IREF, or

(ii) the portion of the profits of the partnership to which the IREF is entitled.

(2) (a) This subsection applies where the aggregate of the specified debt exceeds an amount equal to 50 per cent of the relevant cost of the IREF assets (and that excess is referred to in this subsection as the “excess specified debt” ).

(b) Where this subsection applies, the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income determined by the formula—

where—

A x B

C

A is the property financing costs, B is the excess specified debt, and

C is the total specified debt.

(3) (a) This subsection applies where—

(i) the property financing costs ratio of the IREF is less than 1.25:1 for an accounting period and the sum of the annual IREF profits and the adjusted property financing costs of an IREF is greater than zero, or

(ii) the sum of the annual IREF profits and the adjusted property financing costs of an IREF is zero or lower.

(b) Where this subsection applies—

(i) by virtue of paragraph (a)(i), the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income equal to the amount by which the adjusted property financing costs would have to be reduced for the property financing costs ratio to equal 1.25:1 for that accounting period, and

(ii) by virtue of paragraph (a)(ii), the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income equal to the adjusted property financing costs.

(4) The amount of income referred to in subsections (2) and (3) shall be charged to income tax under Case IV of Schedule D and shall be treated as income—

(a) arising in the year of assessment in which the accounting period in which the amount was taken into account ends, and

(b) against which no loss, deficit, expense or allowance may be set off.

(5) In respect of the charge to income tax imposed under this section and section 739LB—

(a) section 76(6) shall not apply to an IREF which is a company, and

(b) the amount so charged shall, for the purposes of Part 35A, not be profits or gains arising from relevant activities.

(6) (a) Section 739LA shall not apply to an accounting period to which this section applies.

(b) This section shall apply to accounting periods commencing on or after 1 January 2020 and where an accounting period commences before 1 January 2020 and ends after that date, it shall be divided into two parts, 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, and both parts shall be treated as if they were separate accounting periods of the IREF.”,