GREIT12050 - Group conditions and rules: interest cover test (profit: financing cost ratio)
The UK-REIT legislation sets a limit on the amount of interest a
Group REIT can pay in connection with its tax-exempt business in
much the same way as it does for single company UK-REITs –
see
GREIT02200. For a Group REIT, the
differences are that the tax charge is imposed on the residual part
of the principal company of the group, and the terms in the formula
are defined in a group context (but the 1.25 limit is the same).
See paragraph 14 Schedule 17 FA 2006.
For a Group REIT, the ratio is (Profits + Financing
Costs(All)): Financing Costs (External).
Profits
These are the aggregate of the UK profits of G (property rental
business) arising in the accounting period for which the principal
company draws up financial statements as required by paragraph
31(2)(b) Schedule 17 FA 2006, before the deduction of capital
allowances.
The computation of this figure is dealt with in more detail
in
GREIT12150.
Financing Costs (All)
These are the financing costs incurred in respect of the
property rental business of G (property rental business), as set
for the relevant accounting period as set out in the financial
statements that are required by paragraph 31(2)(b) Schedule 17 FA
2006. The computation of this figure is dealt with in more detail
in
GREIT12150.
The definition of financing costs is the same as for single
company UK-REITs, being:
- interest on loans and related costs with the exception of exchange losses;
- debits or credits arising on derivative contracts in relation to debt finance;
- finance costs arising under finance leases; and
- other costs that under generally accepted accounting standards are considered to arise from a financing transaction.
Financing Costs (External)
These are the financing costs incurred in respect of the UK buisness of G (property rental business), excluding intra-group financing for the relevant accounting period, again as set out in the financial statements that are required by paragraph 31(2)(b) Schedule 17 FA 2006. The computation of this figure is dealt with in more detail in GREIT12155.
Consequences of breaching the limit
If the limit is breached, a tax charge by reference to the excess interest is imposed on the residual part of the principal company (regulations 12 and 13 SI 2006/2864)in the same way aas the charge imposed on a single company UK-REIT that breaches the limit – see GREIT02205 for detail.
