AREF has responded to the HM Treasury consultation on the tax deductibility of interest expense. The consultation was launched following publication in October 2015 of the OECD’s final report on BEPS Action 4 (limiting base erosion involving interest deductions and other financial payments).
AREF is concerned that restricting interest deductibility could have a significant detrimental impact on property investment, and a knock-on adverse effect on financing the development of housing and commercial property which are needed to safeguard economic growth and prosperity. Simultaneously it could adversely affect investors in property funds.
In addition:
- identifying a fixed ratio which represents an appropriate level of interest expense for all entities operating in all sectors will be problematic
- a fixed ratio even at the top end of the proposed 10% - 30% corridor is highly likely to lead to a disallowance of interest expense for property funds
- a group ratio rule would be imperative in conjunction with any fixed ratio rule
- grandfathering is critical for existing loans as well as for the re-financing of current projects and structures
- the conditions for a public-benefit project exclusion are so tight as to make it of questionable practical use.