CIR planning for property developers
14/06/24
Property developers who are capitalising some of their financing costs as property trading stock should be aware of the following risk and planning opportunity.
The Corporate Interest Restriction (“CIR”) is legislation which limits how much companies can benefit from utilising financing costs to reduce their Corporation Tax bill. You may recall our blog from last year, which shared insights to the CIR regime. At mgr, our Corporation Tax expertise in the property sector equips us to help clients make the relevant CIR elections on time to maximise future tax relief on financing costs. With this in mind, we are now sharing further insights into CIR risks and planning opportunities for property developers.
When working on a property development project, for accounting purposes, financing costs may be added to the cost of the properties being built, rather than deducting them from profits straight away. This way, only when the development is sold, are the financing costs recognised as an expense and reduce the trading profit realised.
This is where the CIR risk arises. Although any annual interest subject to CIR will inevitably be lower when capitalised during the years of development, the capitalised interest will very likely be subject to CIR in the year of sale. This is because the capitalised group interest element of the calculation during the years of development is being wasted. As a result, the company is unlikely to fully benefit from the tax relief on its financing costs and is likely to be subject to higher tax liabilities.
Here is where the planning opportunity comes in, with the ‘interest allowance (alternative calculation)’ election, which adjusts the CIR calculations to remove this unfair outcome by ensuring the group interest capitalised during the years of the development is only taken into account in the year of sale. This election has wide ranging impacts on the CIR calculation and so it must be considered carefully to ensure there isn’t any downside in other areas of the calculations, especially because this is an irrevocable election.
To fully benefit from the election, it must be made in the first year that interest starts accruing, as it applies from (and including) the year it’s made, but not retrospectively.
Our tax team at mgr has significant experience supporting businesses with CIR planning and compliance to maximise tax relief on financing costs and as a result reduce their tax liability. For further guidance or to discuss the tax implications of your financing structure, please contact Joel Calitchi at joel.calitchi@mgr.co.uk or Esther Ollech at esther.ollech@mgr.co.uk.
