Swap arrangements are often entered into in connection with financing UK real Estate, most commonly to hedge against Interest rate fluctuations. For example, if interest on debt used to finance UK real estate is payable at a floating rate, the borrower may wish to enter into an interest rate swap under which it makes fixed rate payments and receives floating rate payments from its swap counterparty (which it uses to meet its financing liabilities). Although this Practice Note focuses mainly on interest rate swaps, swap arrangements in a property context can cover an array of subject matters, including fluctuations in foreign exchange rates, property prices and rental income.

This Practice Note summarises the key considerations in determining how investors in UK real estate are taxed in relation to their hedging swap arrangements. The tax treatment of swaps for dealers (ie traders) in UK real estate is outside the scope of this Practice Note.

A typical real estate Investment involves a taxpayer acquiring property with a view to holding it for a relatively prolonged