The new rules which restrict the amount of interest that can be treated as tax deductible by individual buy-to-let investors has received a lot of media attention over the last few years. However, finance costs are not always 100% deductible for companies either.
If you’re a corporate property investor or developer looking to finance a new project, read our brief guide to make sure you don’t end up being denied tax relief.
What should corporate investors and developers watch out for?
Thin Capitalisation
Companies that are part of a group often have the option to borrow funds from related companies rather than from third party lenders, or may be able to borrow from third parties on preferential terms, using group guarantees. Whilst this is great from a commercial perspective, the problem comes when the amount the company borrows is in excess of the amount it could have borrowed based purely on its own credit rating. Where this is the case and the company falls with the UK transfer pricing regime, HMRC may seek to deny tax relief on any interest charged on the excess borrowing.
If you think your company may be borrowing more than it could reasonably secure based purely on its own credit risk profile, it’s time to seek advice!
Corporate interest restriction
New rules introduced with effect from 1 April 2017 can cause the tax deductibility of interest charges to be restricted where the net interest paid by all UK companies in the group exceeds £2 million. Where this £2 million limit is exceeded, a complex set of rules apply to calculate the amount of interest that should be disallowed, but in very general terms, interest may be restricted to 30% of group EBITDA.
Assessing whether the £2 million limit has been exceeded can be problematic for larger groups, where the Directors of one UK company may not have oversight over other UK companies in the group as can obtaining the information to perform the necessary calculations. The interest restriction rules and the associated administration can be onerous. To understand whether your company or group could be caught, please get in touch.
An additional trap for developers…
Anti-fragmentation
A particularly nasty set of rules were introduced in 2016 which can cause tax relief on interest payments to be completely denied if the interest arises on a loan from an overseas group company and the loan is used to fund property development in the UK. The rules aim to prevent profits from the development being shifted out of the UK and bite in cases where the lender takes on a proportion of risk from the development, e.g. if the interest rate charged includes a risk premium element.
Any company that is taking advantage of loans from overseas group companies to fund property development projects should seek advice to ensure any interest charges will be tax deductible.
Ensuring that interest costs will be tax deductible can be a bit of a minefield and there are a lot of traps for the unwary. When entering into new financing arrangements, a degree of caution is always recommended.
For further information, please contact Rebecca Wilkinson.
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