18 becoming a uk-reit
UK-REITS are required to meet, on an ongoing basis, an interest cover test: the ‘profit:financing cost ratio’. This test requires that profits from the UK property rental business (as calculated for tax purposes) are at least 1.25 times the interest costs incurred in relation to that business. While failure of this test does not exclude the group from the regime; a tax charge will be imposed on the UK-REIT on any excess interest paid each year, subject to certain limitations. It will be necessary to consider the level of financing expected to be maintained by the business in future in order to determine whether any tax is an acceptable cost of joining the regime. A general restriction on interest deductibility was introduced with effect from 1 April 2017 as part of the UK’s implementation of the OECD’s base erosion and profit shifting initiative. The group’s financing plans will need to be considered and modelled carefully in order to ensure a cost‑efficient structure and tax profile for the group once it becomes a UK-REIT. An interest restriction could have an impact upon the level of PID required.
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