Property Tax – Why can’t corporate landlords deduct their finance costs in calculating their profits? by Satwaki Chanda

Did you know that a corporate landlord can’t deduct its borrowing costs when calculating the profits of its rental business? Don’t believe me? Well, it’s true. And in this article we are going to find out exactly why.

I must confess that I myself had always assumed that interest payments on loans taken out to fund the business were tax deductible. But I got a huge shock one day when I was doing a piece of research and my eyes strayed into another part of the legislation. But once I got over my shock, I realised what was really going on.

So why can’t you deduct interest costs?

It’s in the legislation of course.

This is what it says at CTA 2009 s 211(1):

“The profits of a property business are calculated without regard to items giving rise to –

  • credits or debits within Part 5 (loan relationships), or
  • credits or debits within Part 7 (derivative contracts).”

So there you have it. Do you believe me now? As clear as a pikestaff. Not only are we not allowed to deduct interest costs (loan relationships), but we aren’t even allowed to deduct the costs of hedging the property portfolio through the use of derivatives.

So what has gone wrong?

Something is clearly not right with this analysis, in spite of the words of the legislation.

We know that the Government is currently clamping down on buy to let landlords by restricting interest relief for individuals. We are also told that the restrictions don’t affect companies. This is why tax experts are telling people that it might make sense for individual landlords to incorporate their property portfolios. But why would they want to do this if interest relief isn’t available as we’ve just seen? Can all these tax experts be wrong?

Once again, the clue is in the legislation. And the legislation even tells us where to go. We need to go to CTA 2009 Part 5, the part that deals with loan relationships.

We find that:

  • CTA 2009 Part 5 tells us about how the profits and deficits of a company’s loan relationships are brought into account for corporation tax purposes[i];
  • A loan relationship is one where the company stands as a creditor or debtor in relation to a money debt that arises from a transaction for the lending of money[ii]. So a bank loan to finance a property acquisition is a loan relationship (as one would expect);
  • Profits on a loan relationship are chargeable to corporation tax as income[iii];
  • Profits and losses are computed in accordance with credits or debits as they are recognised in the company’s profit and loss account in accordance with generally accepted accounting practice[iv];
  • For trading loan relationships – where a loan is made for the purpose of a trade – credits are treated as trading receipts while debits are treated as trading expenses[v];
  • For non-trading loan relationships – such as a loan taken out to finance a property business – credits and debits are netted against each other. A surplus is taxed separately from the business profits, while a deficit is relieved in accordance with special rules which we shall discuss further below[vi].

Note the different treatment between trading and non-trading finance costs. For a company engaged in a trading operation, the legislation explicitly states that the profits are to take into account the net interest expense in the calculation. This is in contrast to the position for a non-trading venture, where interest costs are specifically excluded, as we have just seen.

However, when we go on to consider how a non-trading deficit is relieved, it all starts to make sense.

Loan relationships and the tax treatment of non-trading deficits

This is the key issue for a corporate landlord. Interest costs incurred in servicing property loans will normally give rise to a non-trading deficit. This deficit can be relieved in the following way (with the caveat that one cannot relieve the same amount under more than one heading)[vii]:

  • The company can make a claim to set the deficit – all or part – against any of its profits earned during the current year;
  • The company can also carry back all or part of the deficit to earlier years – again, the deficit can be relieved against any of its profits;
  • The company can also surrender all or part of the deficit as group relief;
  • Any amounts left over are automatically carried forward to future years, but this time can only be set against non-trading profits.

(Technically, the carry forward rule has precedence, but is displaced by making an appropriate election for alternative treatment).

And now we see that the answer was there all along. It is possible to claim tax relief for finance costs. The legislation says so. So was the original statement wrong? If so, how could it be wrong? We saw what the legislation said. What’s going on here?

Sorting out the confusion

It looks as if there’s a contradiction in the legislation, but in fact, no contradiction exists. Consider the following statement:

“It is not possible for a corporate landlord to deduct its interest expense in calculating its rental profits.”

Absolutely true. We found that it was based on the legislation which said that:

“The profits of a property business are calculated without regard to items giving rise to… credits or debits within Part 5 (loan relationships)…”

Now consider the following statement:

“A corporate landlord can obtain tax relief for its interest expenses by setting them against its current year profits.”

And this is also true, as we just saw when discussing the ways that a loan relationship deficit can be relieved. But this statement doesn’t quite have the same meaning as the first statement. In short, the two are not inconsistent.

Suppose that we have a property business and the profits before interest amount to £150,000. Suppose also that the business has incurred borrowing costs of £30,000. In everyday parlance we would say that the business has made a profit of £120,000. It is obvious why this should be the case – in calculating the profits we add up all the receipts and take away the expenses. Interest is an expense, so we deduct it.

But for tax purposes, it is not the same:

  • The profits of the property business amount to £150,000 because we are not permitted to deduct the interest in computing those profits;
  • However, the amount subject to corporation tax is £120,000 because we are permitted to deduct the net interest expense in calculating the taxable amount.

In short, the interest is not included in the profits figure, but is taken off afterwards.

It is a subtle difference. Why this rigmarole? It amounts to the same thing in the end doesn’t it?

Actually, there is a good reason as the following example shows.

Why are interest expenses not included in the profits calculation?

The following are profit figures for the financial years 2017 to 2019. We shall assume that the law doesn’t change so that the new loss relief rules announced in Budget 2016 do not apply[viii].

First of all, we shall assume that, contrary to what the legislation says, we are allowed to deduct the interest costs in calculating the rental profits:







Property profits before deducting interest expense


30,000 1,000 3,000
Interest expense (5,000) (10,000) (3,000)
Property profits 25,000 (9,000) Nil

In 2018, there is a loss of £9,000, which can either be set against current year profits, carried forward, or group relieved[i]. But there are no other profits for the year and no profits in the following year to set against. Unlike the case for trading ventures, it is not possible to carry back the loss into the preceding year 2017 and relieve it against the £25,000 profit[ii].

Now let us consider the same figures and see what the actual position is where the legislation tells us to exclude the interest when calculating the rental profits:







Property profits 30,000 1,000 3,000
Interest expense (5,000) (10,000) (3,000)
Profit after interest relief (current year) 25,000 Nil Nil
Loan relationship deficit   (9,000)  
Interest relief (carry back) (9,000)    
Taxable amount 16,000 Nil Nil

In this case, we have a £9,000 loss in 2018 as before. But the way in which this loss has arisen is important. Because the interest expense is treated separately, we can do the following:

  • For the year 2018, the first £1,000 of interest costs can be set against the current year profit of £1,000 – note that for tax purposes, the property business was actually in profit, bizarre though that may seem;
  • This leaves an excess of £9,000 available for relief. But this £9,000 is NOT a property loss, it is a loan relationship deficit. And because it is a loan relationship deficit, it can be carried back, unlike the property loss in the previous example. The difference in treatment can clearly be seen.

So everything’s all right after all!

Well, that is a relief (no pun intended). It really doesn’t make sense for corporate landlords to be denied a tax deduction for borrowing costs which clearly constitute a business expense.

What can we take away with us from this example?

There are two points that can be made, both directed towards those who are practicing at the junior end of the profession, though it won’t hurt senior people to pay attention too!

First of all, there can be occasions where you come across a situation where something is “not quite right” and the true answer is obvious to you. And in most cases, the obvious answer will be the right one. As in this example – when I first came across that “rogue” piece of legislation which appeared to deny tax relief for interest, I just knew it couldn’t really mean what I thought it did. And on this occasion I turned out to be right.

There is a caveat. Just because it’s obvious doesn’t mean it’s true. But you’d still look up the legislation to find out wouldn’t you? (Let’s hope you’re all nodding your heads here. Though I do know there are some practitioners who don’t read the legislation…)

The second point is this.

The above legal analysis is correct. Technically it is true that the profits of a corporate rental business do not include finance costs. And technically it is also true that the landlord can still obtain tax relief for these costs. But you do not tell your client this. All he or she needs to know is that the interest is tax deductible. But don’t tell them why or how you got the answer. Life’s too complicated enough as it is –there's no need to make it any harder, either for yourself or your client!

Satwaki Chanda

Barrister at Law Satwaki-Chanda_avatar_1436686918-200x200

This article was first published on the website Tax Notes ( and can be viewed at the following link:


[i] CTA 2010 ss 62, 66, 99(1)(e).

[ii] Compare the treatment for trading losses at CTA 2010 ss 37, 39, 45, 99(1)(a).

[i] CTA 2009 s 292(1).

[ii] CTA 2009 s 302(1).

[iii] CTA 2009 s 295(1).

[iv] CTA 2009 s 307.

[v] CTA 2009 s 297.

[vi] CTA 2009 ss 299-301, CTA 2009 Part 5 Chapter 16.

[vii] CTA 2009 ss 456-463.

[viii] See the Business Tax Road Map for 2016 at paragraphs 2.56-2.62 and 13.2A. This document can be downloaded at

Written by Ellie MacKenzie

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