UK source interest in a property context
Produced in partnership with Charles Goddard of Rosetta Tax

The following Tax practice note produced in partnership with Charles Goddard of Rosetta Tax provides comprehensive and up to date legal information covering:

  • UK source interest in a property context
  • Interest deductibility
  • Corporation taxpayers
  • Income taxpayers
  • Withholding tax

UK source interest in a property context

For a UK taxpayer carrying on a real estate-related business in the UK, whether it be trading or investing in land, the tax treatment of their financing costs is of prime importance. After the purchase price for the land itself, the next major cost is likely to be the cost of financing that purchase.

It is important to ensure that:

  1. such financing costs are, to the maximum extent possible, tax deductible, and

  2. interest may be paid free from withholding tax

This Practice Note:

  1. briefly considers the rules on the deductibility of interest payable by a UK taxpayer, and

  2. looks in detail at the requirements to withhold tax on payments of interest in a typical real estate holding structure

For the purposes of this Practice Note, references to CGT are to both capital gains tax and corporation tax on chargeable gains.

Interest deductibility

Corporation taxpayers

For a company subject to corporation tax, interest payable on a loan is governed by the loan relationship rules.

For details of what constitutes a loan relationship in a real estate context (including deferred consideration and overage arrangements), see Practice Note: Financing investment in UK real estate—deductibility of interest.

Where a loan relationship exists, credits and debits accruing on that loan relationship (in the company’s profit and loss account, as determined in accordance with generally accepted accounting practice) are brought into account

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